NEW DELHI: The Supreme Court on Saturday took up an interesting question related to global warming — is money earned from trading of carbon credits by green industries taxable? — and said this will have a far reaching impact on industries. The issue could have a bearing on India’s ‘net-zero by 2070’ pledge at Glasgow Climate Summit.
A bench of Justices Sanjiv Khanna and Bela M Trivedi caught the significance of the issue raised by additional solicitor general N Venkataraman and counsel Akanksha Kaul challenging a high court decision that money earned from trading of carbon credits be treated as ‘capital assets’ not liable to income tax.
Justice Khanna said this would have a far reaching impact on the future industrial scenario given the rising clamour against global warming. Venkataraman said, “The issue could be — whether trading in carbon credits trading is part of the business activities of an industry? Today it may be capital assets but it may become a revenue asset as the carbon credits trading income could be classified as income from other sources.”
He said, “If you classify carbon credits trading as income from other sources, there could be a problem. If these are going to be treated as business assets, then the issue will arise in several cases.” The bench didn’t elaborate more as it issued notice to Lanco Tanjore Power Corporation Ltd, which was granted exemption from tax liability on income accrued to it by selling carbon credits to foreign firms.
With these new regulations in force, the pressure on businesses to find ways to reduce their carbon footprint is growing. Most of today’s interim solutions involve the use of the carbon markets. What the carbon markets do is turn CO2 emissions into a commodity by giving it a price. When a company buys a carbon credit, usually from the government, they gain permission to generate one ton of CO2 emissions. With carbon credits, carbon revenue flows vertically from companies to regulators, though companies who end up with excess credits can sell them to other companies.
In the case in hand, Lanco Tanjore Thermal Power Company Ltd was saddled with a tax effect of Rs 567 lakhs for its earning from trading in carbon credits for the assessment year 2010-11. After the case meandered through the tax tribunals, the Madras HC in February termed the earnings capital assets and ruled it was not liable for tax.
The Centre posed this question before the SC, “Whether the HC was justified in holding that the sale of carbon emission reduction, 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 as is obvious from Section 115BBG inserted in the Income Tax Act?”

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