Carbon Credits Ruled Capital Receipt, Not Taxable Income in Sugar Factory Case

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Case Name:

Principal Commissioner of Income Tax VS L.H. Sugar Factory Pvt. Ltd. (High Court of Allahabad)

Income Tax Appeal No. 194 of 2016

Date: 1st August 2016

Key Takeaways:

1. Carbon credits are considered capital receipts, not business income.
2. The court affirmed that carbon credits stem from environmental concerns, not business operations.
3. This ruling aligns with previous judgments, particularly from the Andhra Pradesh High Court.
4. The decision impacts how companies engaged in environmentally friendly practices may be taxed on carbon credit sales.

Issue:

The central legal question was: Are carbon credits to be treated as capital receipts or as taxable business income under the Income Tax Act, 1961?

Facts:

1. L.H. Sugar Factory Pvt. Ltd. is in the business of power generation.
2. The company sold excess carbon credits, generating an income of Rs. 2,77,08,800.
3. The Assessing Officer initially added this amount as taxable income.
4. The Income Tax Appellate Tribunal (ITAT) Lucknow Bench ‘B’ ruled in favor of the assessee (sugar factory).
5. The Principal Commissioner of Income Tax appealed this decision to the High Court.

Arguments:

Appellant (Income Tax Department):

• Argued that carbon credits are primarily linked to electricity generation and cannot be separated from the business activity.
• Cited a decision by the ITAT Cochin Bench in Apollo Tyres Ltd. Vs. Assistant Commissioner of Income Tax, which treated carbon credits as revenue receipts.

Respondent (L.H. Sugar Factory):

• Contended that carbon credits are not directly linked to power generation but arise from environmental concerns.
• Cited the Andhra Pradesh High Court’s decision in Commissioner of Income Tax Vs. My Home Power Ltd., which treated carbon credits as capital receipts.

Key Legal Precedents:

1. Commissioner of Income Tax Vs. My Home Power Ltd., (2014) 365 ITR 82 (Andhra Pradesh High Court): Held that carbon credits are capital receipts.
2. Apollo Tyres Ltd. Vs. Assistant Commissioner of Income Tax, (2014) 31 ITR (Trib) 477 (ITAT Cochin Bench): Held that carbon credits are revenue receipts.
3. India Dyeing Mills (P.) Ltd. Vs. Assistant Commissioner of Income Tax, (2014) 36 ITR (Trib) 55 (ITAT Chennai Bench): Followed the Andhra Pradesh High Court’s judgment, treating carbon credits as capital receipts.

Judgement:

The High Court ruled in favor of L.H. Sugar Factory Pvt. Ltd., affirming that income from the sale of carbon credits is a capital receipt and not taxable as business income. The court agreed with the Andhra Pradesh High Court’s view in the My Home Power Ltd. case, stating:

1. Carbon credits are not an offshoot of business but of environmental concerns.
2. No asset is generated in the course of business; rather, it’s generated due to environmental concerns.
3. Carbon credits are not directly linked to power generation.
4. The income received from the sale of excess carbon credits is a capital receipt and cannot be considered a business receipt or income.

FAQs:

Q1: What are carbon credits?

A1: Carbon credits are permits that allow companies to emit a certain amount of carbon dioxide or other greenhouse gases. Companies that reduce their emissions can sell excess credits to others.

Q2: Why did the court rule carbon credits as capital receipts?

A2: The court determined that carbon credits arise from environmental concerns rather than being a direct product of business operations. They are not directly linked to the company’s primary business activities.

Q3: What impact does this ruling have on businesses?

A3: This ruling means that companies selling carbon credits may not have to pay income tax on the proceeds, as they are considered capital receipts rather than business income.

Q4: Does this ruling apply to all industries?

A4: While this specific case involved a sugar factory engaged in power generation, the principle could potentially apply to other industries that generate and sell carbon credits.

Q5: Can the tax department appeal this decision?

A5: The judgment doesn’t mention any further appeal. However, theoretically, the tax department could appeal to the Supreme Court if they believe there’s a substantial question of law involved.

1. Sri Ashish Agrawal, learned counsel for appellant and Sri R.R. Agrawal, learned Senior Advocate assisted by Sri Suyash Agrawal, Advocate for respondent.

2. We are not giving details of factual aspects of matter since question sought to be raised before this Court as substantial question of law is already covered by some judgments and, therefore, only legal aspects have been considered.

3. This appeal under Section 260­A of Income Tax Act, 1961 has arisen from the judgment and order dated 09.02.2016 passed in ITA No. 418/LKW/2013 by Income Tax Appellate Tribunal, Lucknow Bench 'B', Lucknow.

4. Though appellant has framed four substantial questions of law but learned counsel for appellant could not dispute that except Question no. (A), rest are not substantial questions of law, since based on factual aspects, covered by findings of fact recorded by authorities below, hence as agreed by learned counsel for parties, we have heard appeal finally at this stage on the following substantial question of law:

“Whether under the facts and circumstances of the case, the ITAT was justified in deleting the addition made by Assessing Officer on account of Carbon Credit Rs. 2,77,08,800/­ as it can be safely concluded by following the decision of ITAT Cochin Bench in order dated 07.03.2014 passed in ITA No. 4 (Coch.) of 2013 that the earning of Carbon Credit is primarily linked with the very activity of generation of electricity and it cannot be separated from the same under any circumstances and the income on sale of Carbon Credit would form part of chargeable income under Income Tax Act, 1961.

5. Learned counsel for the appellant submitted that aforesaid question has been answered by Cochin Bench of Income Tax Appellate Tribunal in Apollo Tyres Ltd. Vs. Assistant Commissioner of Income Tax, (2014) 31 ITR (Trib) 477 wherein it has held that “Carbon Credit” is not capital in nature but revenue receipt hence taxable.

6. Per contra, learned counsel appearing for respondent­Assessee submitted that Hyderabad Bench of Income Tax Appellate Tribunal in My Home Power Ltd. Vs. Deputy CIT, (2013) 21 ITR (Trib) 186 has taken an otherwise view which has been confirmed by Andhra Pradesh High Court in Commissioner of Income Tax Vs. My Home Power Ltd., (2014) 365 ITR 82, and Court has said as under:

“3. 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 the 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.”

7. He also submitted that Chennai Bench of Income Tax Appellate Tribunal in India Dyeing Mills (P.) Ltd. Vs. Assistant Commissioner of Income Tax, (2014) 36 ITR (Trib) 55 has considered judgments of Hyderabad Bench of Tribunal as well as Andhra Pradesh High Court in My Home Power Ltd. (supra) and Cochin Bench Tribunal's judgment in Apollo Tyres Ltd. (supra) and thereafter following Andhra Pradesh High Court's judgment, has held that “Carbon Credit” is capital in nature.

8. Learned counsel for appellant could not show that judgment of Andhra Pradesh High Court was taken in appeal. Even otherwise, nothing substantial has been argued on behalf of appellant so as to pursue us to take a view that “Carbon Credit” is not capital in nature but revenue receipt. Hence we find ourselves in agreement with the view taken by Andhra Pradesh High Court in My Home Power Ltd. (supra) and answer aforesaid question against Revenue and in favour of Assessee.

9. The appeal is accordingly dismissed.

Order Date :­ 01.08.2016