Cases

Apollo tyres v. ACIT (Kochi), [2014] 47 taxmann.com 416 (Cochin - Trib.)..........................8

Bharat Sanchar Nigam Ltd. v. Union of India, [2006] 282 ITR 273 (SC).................................8
Carnoustie v IR 14 TC 498........................................................................................................5
CIT v Jagatjit Industries Ltd 287 ITR 46, (2006) 204 CTR (Del) 428......................................9
CIT v Soorajmal 181 ITR 340...................................................................................................9
CIT v Vyas 35 ITR 55 (SC).......................................................................................................5
CIT v. My Home Power, [(2014) 365 ITR 0082 (AP)]........................................................10
CIT vs Sir Kameshwar Singh, (1935) 3 ITR 305.......................................................................3
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd., 58 ITR 241...............10
Empire Jute Co. Ltd. v. CIT, [1966] 57 ITR 36.......................................................................9
Hutchinson v Turner, 31 TC 495...............................................................................................6
Maheshwari Devi Jute Mills v. CIT, [(1965)57 ITR 36].......................................................10
Mersey v Lucas 2 TC 25, 29 (HL).............................................................................................5
Oberoi Hotels v CIT, (2018) 409 ITR 132/304 CTR 988/169 DTR 179 (Cal) (HC).........6
Port of London Authority v IR 12 TC 122 (CA).......................................................................5
Taparia Tools v CIT, 260 ITR 102...........................................................................................10
Tata Consultancy Services v. State of Andhra Pradesh, [2004] 141 Taxman 132....................8
Yasha Overseas v. Commissioner of Sales Tax and Others, (2008 (5) TMI 43 SUPREME
COURT )...............................................................................................................................8
Statutes
Finance Act, 2017, Point No. 48.2 & 48.3, No. 7, Acts of Parliament, 2017 (India)................7
Income Tax Act, 1961, § 115 BBG, No. 43, Acts of Parliament, 1961 (India).........................7
Income Tax Act, 1961, §28, No. 43, Acts of Parliament, 1961 (India).....................................3
Other Authorities
Carbon credits capital or revenue, [2013] 29 taxmann.com 243 (ART)..................................10
Internet Sources
A blueprint for scaling carbon markets,
https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-
scaling-voluntary-carbon-markets-to-meet-the-climate-challenge (last visited Feb 15,
2022)......................................................................................................................................4
Accounting for carbon credits, https://cleartax.in/s/accounting-for-carbon-
credit#:~:text=Carbon%20Emission%20Reduction%20(CER)%20is,to%20generate
%20future%20economic%20benefits.&text=Thus%20the%20CER%20should%20be,cost
%20or%20net%20realizable%20value (last visited Feb 15, 2022).......................................8
Carbon credit a brief study, TAXGURU, https://taxguru.in/corporate-law/carbon-credit-brief-
study.html#:~:text=green%20technology%20globally.-,Disadvantages%3A,emission%20at
%20some%20other%20place (last visited Feb 15, 2022)......................................................4
Carbon Credit Definition, https://www.investopedia.com/terms/c/carbon_credit.asp (last
visited Feb 15, 2022)..............................................................................................................4
Carbon trading how does it work, https://www.bbc.com/news/science-environment-34356604
(last visited Feb 15, 2022)......................................................................................................4
Distinction between capital and revenue receipt, https://taxguru.in/income-tax/distinction-
capital-revenue-receipt.html (last visited Feb 15, 2022)........................................................6
Income from sale of carbon credits, https://taxguru.in/income-tax/income-sale-carbon-credits-
taxed-business-income.html (last visited Feb 15, 2022)......................................................10
John Smith v Moore, (1921) 2 A.C. 13....................................................................................6
Pros and cons of carbon offsets, https://www.greenbiz.com/article/benefits-and-drawbacks-
carbon-offsets (last visited Feb 15, 2022)..............................................................................4
Revenue receipt versus capital receipt, https://www.wallstreetmojo.com/capital-receipts-vs-
revenue-receipts/ (last visited Feb 15, 2022).........................................................................6
Want to understand carbon credits,
https://www.forbes.com/sites/erikkobayashisolomon/2020/03/13/want-to-understand-
carbon-credits-read-this/?sh=594139c871aa (last visited Feb 15, 2022)...............................4
THE MADRAS HIGH COURT WAS NOT JUSTIFIED IN HOLDING THAT THE SALE
OF CARBON EMISSION REDUCTION (CER), ALSO KNOWN AS CARBON CREDITS,
IS TO BE CONSIDERED AS CAPITAL RECEIPTS AND NOT LIABLE TO TAXATION,
WITHOUT APPRECIATING THAT CARBON CREDIT IS REVENUE IN NATURE AND
TAXABLE AS CAN BE SEEN FROM THE INTENTION OF LEGISLATURE HAVING
BEEN CLARIFIED BY THE INTRODUCTION OF SECTION 115BBG OF THE INCOME
TAX ACT, 1961.

It is submitted before the Hon’ble Supreme Court of India that the Madras High Court in
TCA 149 of 2021, namely PCIT vs M/s. Vulcan Energy Pvt. Ltd. Passed an order stating that
based on the facts and circumstances of the case, the Income Tax Appellate Tribunal,
Chennai was legally correct in holding that the sale of carbon emission reduction (CER) also
known as carbon credits is to be considered as capital receipt and not liable to tax. However,
the Hon’ble Madras High Court failed to consider several related material facts and aspects
which are dealt in the following arguments

[1].Sale of Carbon Emission Reduction (CER), also known as Carbon Credits is business
in nature
[2].Carbon Credits cannot be classified as Capital Receipt since, these are revenue in
nature
[3].CERs can be taxed as intangible assets
[4].Purchase of Loom hours, similar to the nature of carbon credits isn’t necessarily
capital or revenue expenditure, rather, depends on the transaction and other factors
[5].Amendment of S. 115BBG of Income Tax Act is mere clarification and not
amendment as Carbon Credits were already taxed

[1] SALE OF CARBON EMISSION REDUCTION (CER), ALSO KNOWN AS CARBON CREDITS IS

BUSINESS IN NATURE

Under § 28 of IT Act1, profits and gains accruing out of business shall be chargeable to
income-tax. It is submitted that in the case of CIT vs Sir Kameshwar Singh 2, it was held that
whether a particular item or receipt is taxable or not depends upon the nature of the
recipients’ business. It is pertinent to submitted before the Hon’ble Supreme Court that

1
Income Tax Act, 1961, §28, No. 43, Acts of Parliament, 1961 (India).
2
CIT vs Sir Kameshwar Singh, (1935) 3 ITR 305.
Income has an inclusive under S. 2(24)3 of the Income Tax Act, 1961. However, S.2(24)(i) of
the Act says that income includes “Profits and gains”.

A carbon credit is a permit that allows the company that holds it, to emit a certain amount of
carbon dioxide or other greenhouse gases. One credit permits the emission of a mass equal to
one ton of carbon dioxide. 4 Carbon Emission Reduction (CER) is a market-oriented
mechanism to reduce greenhouse gas emissions5. CER Certificate has market value due to the
intrinsic nature and value of carbon credits coupled with their free transferability and is a
tradable item/ commodity6. The United Nations’ Intergovernmental Panel on climate Change
i.e., United Nations Framework on Climate Change developed a carbon credit proposal to
reduce the worldwide carbon emissions in the agreement of Kyoto Protocol, 1997, which had
set binding emission reduction targets for the countries that signed it7.

The proximate reason for receipt of money on transfer of carbon credit is that someone in the
developed countries is generating more harmful gas emission that he was permitted to
generate, under the Kyoto protocol, and instead of reducing the harmful gas emission on his
own or to supplement his efforts in reduction of these harmful emissions, he is buying credits
for the reduction in harmful gases achieved by someone else in this developing country 8.
What does a person get by buying these carbon credits or CERs. For each carbon credit that a
person in the developed world buys, he gets right to emit one more ton of CO2 (carbon
dioxide) or CO2e (carbon dioxide equivalent gases). Nobody would normally buy these
credits as a token of appreciation of the work done in the developing world. The purchase of
these credits is driven by the business compulsions. The business compulsion is to meet the
emission norms. These emission norms are met by reduction in emission on its own and also
paying money to someone in the developing world to buy credit for what environmental
friendly work has been done by that entity. All this is in no way reducing the emissions but
merely redistributing the right to emit greenhouse gases. That is an act too unkind to the

3
Pros and cons of carbon offsets, https://www.greenbiz.com/article/benefits-and-drawbacks-carbon-offsets (last
visited Feb 15, 2022).
4
Carbon Credit Definition, https://www.investopedia.com/terms/c/carbon_credit.asp (last visited Feb 15, 2022).
5
A blueprint for scaling carbon markets, https://www.mckinsey.com/business-functions/sustainability/our-
insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge (last visited Feb 15,
2022).
6
Carbon trading how does it work, https://www.bbc.com/news/science-environment-34356604 (last visited Feb
15, 2022).
7
Want to understand carbon credits, https://www.forbes.com/sites/erikkobayashisolomon/2020/03/13/want-to-
understand-carbon-credits-read-this/?sh=594139c871aa (last visited Feb 15, 2022).
8
Carbon credit a brief study, TAXGURU, https://taxguru.in/corporate-law/carbon-credit-brief-
study.html#:~:text=green%20technology%20globally.-,Disadvantages%3A,emission%20at%20some%20other
%20place (last visited Feb 15, 2022).
global concerns, and it ends up supporting the global warming rather than controlling it.
There is no point in glorifying these transactions of carbon credits as an act of benevolence or
by putting those buying and selling these carbon credits on a higher moral pedestal.

Undoubtedly, generation of carbon credit does certainly mean that the entity getting the
carbon credits has achieved reduction in harmful gas emissions, and that is an environmental
friendly achievement. It is a testimonial of the good work done by the entity. The carbon
credits are not, however, for being showcased. Doing good for the environment is one thing,
getting it certified and practically monetizing it is quite another. It is not a standalone activity
to lower the harmful emissions. What is practically being done is use of environment friendly
measures in the course of normal business activity. The emission reduction is an integral
party of the core activity carried out by the business. It is not some philanthropic act which
gets the assessee before us these carbon credits, it is the manner in which the business
activities are carried out, when found to be environment friendly and resulting in lesser
emission of harmful gases, result in these carbon credits. All that one gains from these carbon
credits in India is the right to transfer it. These credits have no other value. When these rights
are transferred to someone in the developed world, it does not do any good to any noble
cause- much less to the environmental concerns of this planet. If at all it does good to
anything, it is to seller's cash register and to buyer's insensitivity to the environment. The
activist criticism that carbon credit sale consideration is something which has given
legitimacy to the developed world's continuing apathy to the environmental concerns, may
perhaps be too exaggerated but not wholly unjustified.

Take, for example, a situation in which the unit is closed and does not function at all, it can
be fairly accepted that there cannot be generation any CERs in such a situation. In such a
situation, we do not subscribe to the view that the CER "is not generated or created due to
carrying on business but it is accrued due to 'world concern'". We are of the view that the
CER is generated due to carrying on business in a manner friendly to the cause of reduction
of harmful gases and thus protect the environment 9. The gains of a trade10 are that which are
gained by the trading11, for whatever purposes the same are used— whether gained for the
benefit of individuals or gained for the benefit of a community by a public body 12. Where a
publishing house produced certain publications to assist a charitable association, and there
9
Port of London Authority v IR 12 TC 122 (CA).
10
Carnoustie v IR 14 TC 498.
11
CIT v Vyas 35 ITR 55 (SC).
12
Mersey v Lucas 2 TC 25, 29 (HL).
was an understanding that all the profits of the venture were to be paid over to the association
and in fact, they were so paid over, the revenue was nevertheless held entitled to tax the
profits13. Hence CERs are in the nature of profits and gains accruing from business through
trade.

CARBON CREDIT IS REVENUE RECEIPT IN NATURE- On the basis of the nature of

assets, if a receipt is referred to fixed asset, it is capital receipt and if referable to circulating
asset, it is revenue receipt14. Fixed asset is what helps owner to earn profit by keeping it in the
possession such as, Plant, Machinery, Building, etc. On the other hand, Circulating Asset is
what helps owner to earn profit by selling it to others such as, Stock-in Trade. Circulating
Asset is taxable as a revenue item when referable to circulating capital.15

In the case of John Smith v Moore16, Lord Haldane quoted with approval the distinction
drawn by Adam Smith between Fixed and Circulating Capital. Fixed Capital is what the
owner turns to profit by keeping it in his possession and circulating capital is capital which is
turned over and in process of it, it yields profit or loss.

It is further submitted that the fixed capital is not directly involved in the process of turned
over and the income-tax charged remains unaffected by it. Circulating capital or stock-in-
trade is also known as Trading Assets, and fixed capital is known as Capital Assets. Thus,
something which is capital asset for one person shall become Trading Asset according to the
nature and trade. As has also been observed by this Hon’ble Court in the case of Oberoi
Hotels v CIT17, that something received for loss of capital is a capital receipt and something
received as profit in a trading transaction is taxable income.

AMENDMENT OF S. 115BBG OF INCOME TAX ACT IS MERE CLARIFICATION AND NOT

AMENDMENT AS CARBON CREDITS WERE ALREADY TAXED

It is submitted before this Hon’ble Court that an amendment may be made by the Legislature
not only to change the law but also to clarify the position. So, on any aspect where the law is
vague or silent, the amending provision removes such vagueness or silence and can certainly
be taken as guidance for construction of unamended provision. Further, the rules of

13
Hutchinson v Turner, 31 TC 495.
14
Distinction between capital and revenue receipt, https://taxguru.in/income-tax/distinction-capital-revenue-
receipt.html (last visited Feb 15, 2022).
15
Revenue receipt versus capital receipt, https://www.wallstreetmojo.com/capital-receipts-vs-revenue-receipts/
(last visited Feb 15, 2022).
16
John Smith v Moore, (1921) 2 A.C. 13.
17
Oberoi Hotels v CIT, (2018) 409 ITR 132/304 CTR 988/169 DTR 179 (Cal) (HC).
interpretation of amendments of a statutory provision would equally hold good for
interpretation of amendments of a statutory rule. Thus, it has been held that subsequent
legislation or amendment shall be considered to fix the proper interpretation to be put on the
statutory provision as they were earlier.

A declaratory or explanatory amendment is generally passed to supply an obvious omission

or to clear up ambiguity to the meaning of previous law and when such statute is merely
declaratory or curative, the retrospective operation of such amendment or statutory provision
is generally intended.

It is pertinent to note that the Point No. 48.2 and 48.3 of Explanatory Provisions of Finance
Act, 201718 says that Income-Tax Department has been treating the income on transfer of
carbon credits as business income which is subject to tax at the rate of 30%. The Courts have
pronounced divergent views on the question whether the income received or receivable on
transfer of carbon credits is a revenue receipt or capital receipt. And, in order to bring clarity
and unambiguity on the issue of taxation of income from transfer of carbon credits and to
encourage measures to protect the environment, such amendment of S. 115BBG 19through
inserting it was done so as to provide that where the total income of the assessee includes any
income from transfer of carbon credit and such income shall be taxable at the concessional
rate of 10%.

Therefore, it’s straightforward clear that since earlier the carbon credits were taxable under
the garb of provisions of Income Tax Act, but that was at 30% rate and in order to bring a
clarity, unambiguity on this issue such provision of S.115BBG was inserted and income from
transfer of carbon credit was made taxable at 10%. Thus, such amendment was only a mere
clarification or declaratory in nature having retrospective operation as generally intended.

CERS CAN BE TAXED AS INTANGIBLE ASSETS AS THESE ARE TRADEABLE

It is submitted before this Hon’ble Court that the Carbon Emission Reduction, also known as
Carbon Credits, can be taxed as intangible assets. The nature, substance and manner/
modalities of the trading of Carbon Credits makes the product known similar to the goods
mentioned under the category of “intangible goods”. It has been established in the above
contentions that the CERs have market value and are tradeable.

18
Finance Act, 2017, Point No. 48.2 & 48.3, No. 7, Acts of Parliament, 2017 (India).
19
Income Tax Act, 1961, § 115 BBG, No. 43, Acts of Parliament, 1961 (India).
In Yasha Overseas v. Commissioner of Sales Tax and Others 20 (Civil Appeal No. 2155 of
2000), it was held that the product known as Certified Emission Reductions (CERs) has
market value, thus, it is capable of being bought, sold, delivered, stored and possessed. Since,
by virtue of the intrinsic nature, the CERs have acquired status of commodity, the
MultiCommodity Exchange of India (MCX), the country’s leading commodity exchange is
also trading in the CERs along with other commodities.

In Tata Consultancy Services v. State of Andhra Pradesh 21 and Bharat Sanchar Nigam Ltd. v.
Union of India22 the criteria for defining intangible assets was explained, thus CERs were
goods and capable of trading.

CARBON CREDITS CANNOT BE CLASSIFIED AS CAPITAL RECEIPT SINCE, THESE ARE NOT

CASUAL AND NON-RECURRING IN NATURE

It is submitted before this Hon’ble Court that the Capital Receipts are receipts that create
liabilities or reduce financial assets, also, refer to incoming cash flow. These are of casual and
non-recurring, whereas the Revenue Receipt are those receipts that neither reduce asset of the
company, nor they create any liability and is of regular and recurring nature. Recurring
implies that they are earned during the normal course of business, and non-Recurring implies
they do not occur again and once in the accounting year.

In Tata Consultancy Services v. State of Andhra Pradesh 23, the Hon’ble Supreme Court held
that the attributes such as, utility and marketability decide whether goods are tangible or
intangible. It’s noted that CER is intangible in nature. Income from Intellectual Property
Rights either through assignment or licensing is to be treated as Capital gains under the
Income Tax Act, 196124. It is further submitted that the CERs are akin to import entitlements,
the incentives in the form of carbon credit are given by the government to avoid the use of
fossil fuels in the industry25. The companies try to make profit by selling the Carbon Credits,
which, have features almost similar to import entitlements. If an assessee exploits the Import
entitlements by actually importing the goods and then sell it, the sale proceeds cannot be

20
Yasha Overseas v. Commissioner of Sales Tax and Others, (2008 (5) TMI 43 SUPREME
COURT ).
21
Tata Consultancy Services v. State of Andhra Pradesh, [2004] 141 Taxman 132.
22
Bharat Sanchar Nigam Ltd. v. Union of India, [2006] 282 ITR 273 (SC).
23
Supra note 21.
24
Accounting for carbon credits, https://cleartax.in/s/accounting-for-carbon-credit#:~:text=Carbon%20Emission
%20Reduction%20(CER)%20is,to%20generate%20future%20economic%20benefits.&text=Thus%20the
%20CER%20should%20be,cost%20or%20net%20realizable%20value (last visited Feb 15, 2022).
25
Apollo tyres v. ACIT (Kochi), [2014] 47 taxmann.com 416 (Cochin - Trib.).
classified as capital receipts. Even using other manner to exploit the IEs will not make any
change in the character of the receipt. The sale of import entitlement is one of the modes of
exploiting the import entitlement, and, therefore, will clearly be a revenue receipt.

Therefore, it can be correctly concluded that income from transfer of carbon credits is of
tradeable and intangible nature and thus liable to be taxed.

Purchase of Loom hours, similar to the nature of carbon credits comes under revenue
expenditure –

After contending about the nature of carbon credits as not to be of capital receipts, it becomes
imperative to discuss that the loom hours, which refers to hours of Right to use a particular
machine for a particular time. The loom hours have same nature to that of Carbon credits in
the manner that, Carbon credits are also allowances that the company who has reduced the
consumption of fossil fuels and assisted in reducing emissions of Greenhouse Gases (GHGs)
gives to other company who require such allowances so as to carry on production beyond the
limits of using the fossil fuels as allowed.

It is pertinent to note that the expenditure incurred on purchase of loom hours is on revenue
account, as been rightly mentioned by the Hon’ble Supreme Court in Empire Jute Co. Ltd. v.
CIT26. Generally, if a jute mill has the right to work a work a certain number of loom hours
under an agreement formulated by a trade association to avoid losses owing to over-
production, and, finding itself unable to utilise all the loom hours, ‘transfers’ some loom
hours to another mill for a cash payment as permitted under the agreement, the receipt would
be on revenue account27.

Thus, loom hours are neither capital nor revenue assets in the legal or commercial sense 28.
The allotment of loom hours to different units under a trade agreement constitutes merely a
contractual restriction on every unit’s right under the general law to work its factory to its full
capacity, and the ‘purchase’ of loom hours is merely a relaxation of that restriction. The price
received by the ‘seller’ of loom hours is a trading receipt29 in substitution of the profits which
would have been made by working the loom hour.

26
Empire Jute Co. Ltd. v. CIT, [1966] 57 ITR 36.
27
CIT v Soorajmal 181 ITR 340.
28
CIT v Jagatjit Industries Ltd 287 ITR 46, (2006) 204 CTR (Del) 428.
29
Madras Ind Inv Corpn v CIT 225 ITR 802.
Thereafter, in the decision of the Privy Council in Commissioner of Taxes v Nchanga
Consolidated Copper Mines Ltd.30 where at the time of over production, the payment by the
assessee to another manufacturer in the same field in consideration of the latter agreeing to
cease production for one year was held to be on revenue account.

It is further submitted before this Hon’ble Court that though the decision of CIT v. My Home
Power31 was decided on the precedent of Maheshwari Devi Jute Mills 32, but it cannot be
regarded as an authority for the proposition that payment made by an assessee for purchase of
loom hours would be capital expenditure33 and since it is similar to the nature of CER, the
transaction should be considered under the head of capital receipt.

Furthermore, it’s not a universally true proposition that what may be capital receipt in the
hands of the payee must necessarily be capital expenditure in relation to the payer 34. The fact
that a certain payment constitutes income or capital receipt in the hands of the recipient is not
material in determining whether the payment is revenue or capital.35

30
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd., 58 ITR 241.
31
CIT v. My Home Power, [(2014) 365 ITR 0082 (AP)].
32
Maheshwari Devi Jute Mills v. CIT, [(1965)57 ITR 36].
33
Taparia Tools v CIT, 260 ITR 102.
34
Income from sale of carbon credits, https://taxguru.in/income-tax/income-sale-carbon-credits-taxed-business-
income.html (last visited Feb 15, 2022).
35
Carbon credits capital or revenue, [2013] 29 taxmann.com 243 (ART).