Addition by Adopting Carbon Credit Receipt of Earlier Years is Baseless against Cannons of Taxation: ITAT [Read Order]

In a significant ruling regarding taxation of receipts of carbon credit, the Income Tax Appellate Tribunal (ITAT), Bangalore has held that the addition made by adopting receipt from carbon credit of earlier years as the income of relevant assessment year is without any basis and is against the cannons of taxation.

The assessee had shown carbon credits of Rs.135.46 lakhs under the head “Revenue from Operations” for the earlier year ended 31.03.2011. However, for the previous year ended 31.03.2012, relevant to the year under consideration i.e., Assessment Year 2012-13, the assessee has not shown any carbon credit under this head. The assessing officer made an addition of Rs.1,35,45,905/- towards Carbon Credit shown as outstanding as on 31.12.2011 but not shown as outstanding as on 31.12.2012, and therefore adding the same to the income of the assessee.

During the proceedings, the assessee maintained that there has been no receipt or accrual of carbon credit during the year under consideration.

In order to address the issues relating to pollution and global warming, the member countries of UN have committed to the Kyoto protocol to limit and reduce greenhouse gas emissions. Countries which control emissions are allotted carbon credits which is a tradable certificate representing the right to emit one tone of carbon dioxide. A reduction in emissions entitles the entity to a credit in the form of a Certified Emission Reduction (CER) certificate which is granted by a Board sponsored by the UN projects in developing countries.

The Tribunal was of the view that the right course of action for the AO was to examine and test the claim of the assessee that there was no receipt on accrual of carbon credit during the year under consideration; i.e., in the Financial Year ending 31.03.2012. In case the AO has found that there has been receipt / accrual of carbon credit, then the AO should have quantified such receipt / accrual.

“Thereafter, the AO should have examined whether such carbon credit was capital in nature or revenue income in nature. While making such a determination, the AO has to consider the judicial pronouncements rendered in this regard by various courts / Tribunals. In case he finds that the cited decisions are not to be followed, he should render a finding as to why those decisions are not to be followed. A cursory statement brushing aside their applicability to the issue at hand on the ground that the cited decisions are not pertaining to his jurisdiction is not tenable. In the absence of the above, the addition made by the AO on account of non-existent income from carbon credits in the year under consideration is not at all acceptable. We observe that the AO has not even rendered a finding that the income from carbon credits has actually been received by or accrued to the assessee. Adopting the figure of carbon credits of the earlier year and assuming / presuming the same as the assessee’s income in the year under consideration as income from carbon credit is absolutely baseless, untenable, unacceptable and is contrary to all cannons of taxation,” the Tribunal observed.