Wednesday, November 7, 2012

ITAT considered ‘carbon credits’ as inventory yet held income from their sale as ‘capital receipts

The assessee-company was generating power through biomass power generation unit. For the relevant year, it sold 1,70,556 Carbon Credits (‘CERs’) to a foreign company

for Rs. 12.87 crores. During assessment, the AO opined that the sale proceeds of the CERs were revenue receipts since the CERs are a tradable commodity and are even

quoted in the Stock Exchange. Accordingly, a tax demand of Rs. 3.60 crores was raised. The CIT (A) confirmed the order of AO.

On appeal, the Tribunal held in favour of assessee as under:

1) Carbon credit is in the nature of "an entitlement" received to improve world’s atmosphere and environment reducing carbon, heat and gas emissions;

2) Carbon credits are made available on account of saving of energy consumption and not because of assessee’s business. Transferable Carbon Credit is not a result or

incidence of one's business and it is a credit for reducing Carbon emissions;

3) The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying the business;

4) In the case of CIT vs. Maheshwari Devi Jute Mills Ltd. 57 ITR 36 the SC held that transfer of surplus loom hours to other mill was capital receipt and not income.

Being so, the consideration received by the assessee in respect of Carbon Credit was similar to consideration received by transferring of loom hours.

5) 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.

Thus, the entitlement earned for Carbon Credits can, at best, be regarded as a capital receipt and can’t be taxed as a revenue receipt.

Apart, from above observation, the Tribunal at the end of judgment took a view in accordance with Guidance Note issued by ICAI which states that 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 for as per AS-2 (Valuation of inventories). Thus, the assessee generating these should apply AS-9 to recognise revenue in respect of sale of CERs - MY HOME POWER LTD.V. DCIT [2012] 27 27 (Hyderabad - Trib.)