Deduction u/s. 80-IA on carbon credit income

[vdboss]

The Income Tax Department has been disallowing deduction under section 80-IA to power generating units in respect of income from sale of carbon credits [units of Certified Emission Reduction ('CER')] relying on the Hon'ble Supreme Court's decision in the case of Liberty India.

The department is of the view that profits from sale of CERs are ancillary profits and not profits derived from eligible business and hence deduction u/s 80-IA should not be allowed to CER income.

In fact, the CERs are issued based on net electricity generated and hence do not fall in the category of investment linked incentives or Profit Linked incentives.

Whether comparison of income from sale of CERs with export incentives is justified?

[satyanveshi]

you can take the alternative argument that carbon credits are not at all taxable. Because department is relying on the SC decision which is on duty draw backs you can take the argument that duty draw backs are taxable in view of the  specific provisions of sec. 28(iiia)/(iiib)/(iiic) whereas there is no specific provision like the above to tax carbon credits. Further, in DTC to be introduced, carbon credits are taxed separately whereas in Incometax Act 1961 there is no provision to tax such carbon credits. If this argument is taken, there appears to be some chances, at least some appellate authorities at some point of time may think  in a different manner and allow relief otherwise, it is very difficult to counter the argument of the department.

[pawansingla]

The Department was finding it difficult to tax as per Income Tax Act, 1961 , this is the reason the same is made explicit in the DTC. I think i have read some judgement on the issue in favour of assessee.i will try to search.

[pawansingla]

Carbon credits trading on Income Tax radar
The Income Tax Department has trained its sights on the carbon credits trading business in the country with a view to crack down on tax evasion in the sector, which has been estimated at Rs 1,000 crore. The department has now decided to keep a tab on the trade by putting its intelligence wing on the job to gather information on entities involved in trading carbon credits and pass on the relevant data to I-T investigation and international taxation wings for taking action against tax evasion in this sector. A preliminary study by the I-T Department found that large companies listed on the stock exchanges are not exactly ensuring taxes against the profits out of the sale of carbon credits and are putting the money earned in other businesses. India is one of the largest producers of carbon credits in the world.

[satyanveshi]

on 02-11-2012,  Hyd ITAT has held in the case of My Home Power Ltd  that  the proceeds  received by selling CERs i.e. carbon credits are capital receipts and accordingly not taxable. The same is reported in 27 taxman.com 27. Till a High Court reverses this decision, the same can be utilised by everybody to strengthen the argument that carbon credits are not revenue receipts to attract tax liability.

[pawansingla]

Same as sales tax subsidy held to be capital receipt by Mumbai special bench and upheld by Bombay High court and SLP dismissed by Apex court.