The Madras High Court while remitting the matter to AO for fresh adjudication ruled that Carbon Credit receipts cannot be considered as business income, it is a capital receipt.
The revenue raised the issue that the Appellate Tribunal is correct in holding that sale of Carbon Credits is to be considered as Capital Receipt and not liable for tax under any head of income under the Income Tax Act, 1961.
The revenue relied on the Ambica Cotton Mills Ltd., vs. DCIT wherein it was held that carbon credit receipts cannot be considered as business income and it is a capital receipt. Hence, the assessee’s claim under Section 80IA of the Act is untenable, as deduction under Section 80IA of the Act is allowable only on profits and gains derived by an undertaking.
The division bench of Justices M.Duraiswamy and R.Hemlatha noted 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. It was also found that the carbon credit is not even directly linked with the power generation and the income is received by sale of the excess carbon credits.
The ITAT said that the disallowance under Section 14A of the Act read with Rule 8D of the Rules is remanded to the Assessing Officer for fresh decision on merits and in accordance with law, after opportunity to the assessee.
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