Income: Capital or revenue receipt: A. Y. 2007-08: Assessee engaged in generation of power: Sale of carbon credits: Not an offshoot of business: No asset generated in the course of business but generated due to environmental concerns: Sale receipt is a capital receipt: No cost of acquisition: Profit is not assessable to tax:

The assessee was carrying on the business of power generation. In the A. Y. 2007-08, the assessee claimed that the receipts on sale of carbon credits is a capital receipt and not income. The assesee further claimed that there was no cost of acquisition and accordingly that the profit on sale of carbon credit is not assessable to tax. The Assessing Officer rejected the claim and assessed the receipts as business income. The Tribunal allowed the assessee’s claim.

In appeal before the High Court, the Revenue contended that the generation of carbon credits is intricately linked to the machinery and processes employed in the production process by the assessee. The Revenue also contended that the Tribunal is not correct in holding that there is no cost of acquisition or cost of production to get entitlement for the carbon credits. The Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) T he Tribunal has factually found 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.’
ii) We agree with this factual analysis as the assessee is carrying on the business of power generation. The carbon credit is not even directly linked with power generation.
iii) O n the sale of excess carbon credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income.
iv) In the circumstances, we do not find any element of law in this appeal. The appeal is accordingly dismissed.”