Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Income From Sale Of Carbon Credit Is Taxable Under Capital Gains?

QUERY: A chemical company by installing sophisticated equipment for pollution control generates carbon credit. Carbon credit which is sold for Rs. 20/- crores. The Income tax Department is of the view that the proceeds are liable to tax under business income. The auditor is of the view that the income is taxable under capital gains.
ANSWER: In My Home Power Ltd. v. DCIT [IT Appeal No. 1114 (Hyd.) of 2009 dt. Nov. 02, 2012] the Hyderabad Tribunal has held as under:

“Carbon credit is in the nature of an entitlement received to improve world atmosphere 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 revenue receipt. It is not generated or created due to carrying on business but it is accrued 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 credit has no element of profit or gain and it cannot be subjected to tax in any manner under the head of income. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, 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 assessee who has surplus carbon credits can sell them to other assessee 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 person having carbon credits gets benefit by selling the same to person who needs carbon credit to overcome one’s negative point carbon credit. The amount received is not received by producing and/or selling any product, bi-product or for rendering any service for carrying on the business. Thus, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credit is capital receipt.”

This decision has been approved by the Andhra Pradesh High Court in CIT v. My Home Power Ltd. (365 ITR 82).

The above decisions have been followed by Chennai Tribunal in Ambika Cotton Mills Ltd. v. DCIT [40 Taxmann.Com 171] and in Sri Velayudhaswamy Spinning Mills (P) Ltd. v. DCIT [40 taxmann. Com 141]. Recently Jaipur Tribunal in Shree Cement Ltd. v. ACIT [ITA BO. 503/JP/ 2012 dated Jan. 27, 2014] has also taken similar view.

Posted in Income-tax
One comment on “Whether Income From Sale Of Carbon Credit Is Taxable Under Capital Gains?
  1. Jaddu krishna murthy says:

    We received carbon credits on sale of FAL-G-Bricks Rs 1048806/-for the years 2010 to 2012 for three years.now the sales tax people says be paid tax @ 14.5% even on intanotable credits. Please clarify.

Leave a Reply

Your email address will not be published. Required fields are marked *


Credit: Several of the queries and answers are reproduced with permission from the AIFTP Journal. We thank AIFTP for generously allowing us to host their research material.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org