MEMORIAL on behalf of the APPELLANT

Team Code: Q

12th K.R RAMAMANI MEMORIAL NATIONAL TAXATION MOOT COURT

COMPETITION, 2022

Before
THE HON’BLE SUPREME COURT OF INDIA

FILED UNDER ARTICLE 136 OF THE CONSTITUTION OF INDIA, 1950

Principal Commissioner of Income Tax …. (Appellant)

Versus

M/s. Vulcan Energy Pvt. Ltd. …. (Respondent)

MEMORIAL for THE APPELLANT/ APPLICANT

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MEMORIAL on behalf of the APPELLANT

TABLE OF CONTENTS

INDEX OF AUTHORITIES...................................................................................................... 4

STATEMENT OF JURISDICTION.......................................................................................... 7

STATEMENT OF FACTS ........................................................................................................ 8

ISSUES RAISED ....................................................................................................................... 9

A. WHETHER THE HC WAS 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? ...... 9

SUMMARY OF ARGUMENTS ............................................................................................. 10

ARGUMENTS ADVANCED ................................................................................................. 11

I. 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.................................................. 11

[1.1] Sale of Carbon Emission Reduction (CER), also known as Carbon Credits is
business in nature ............................................................................................................. 12

[1.2] Carbon Credit Is Revenue Receipt In Nature .................................................... 14

[1.3] Amendment of S. 115BBG of Income Tax Act is mere clarification and not
amendment as Carbon Credits were already taxed .......................................................... 15

[1.4] CERs can be taxed as intangible assets as these are tradeable .......................... 16

[1.5] Carbon Credits cannot be classified as Capital Receipt since, these are not
casual and non-recurring in nature ................................................................................... 17

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MEMORIAL on behalf of the APPELLANT

[1.6] Purchase of Loom hours, similar to the nature of carbon credits comes under
revenue expenditure ......................................................................................................... 18

PRAYER .................................................................................................................................. 20

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MEMORIAL on behalf of the APPELLANT

INDEX OF AUTHORITIES

[CASES] PAGE NO.

Apollo tyres v ACIT (Kochi) [2014] 47 taxmanncom 416 (Cochin - Trib) 17

Bharat Sanchar Nigam Ltd. v Union of India [2006] 282 ITR 273 (SC) 16
Carnoustie v IR 14 TC 498 14
CIT v Jagatjit Industries Ltd 287 ITR 46 (2006) 204 CTR (Del) 428 18
CIT v Kamal Behari Lal Singha [1971] 82 ITR 460 (SC) 17
CIT v My Home Power [(2014) 365 ITR 0082 (AP)] 19
CIT v Sir Kameshwar Singh (1935) 3 ITR 305 12
CIT v Soorajmal 181 ITR 340 18
CIT v Vyas 35 ITR 55 (SC) 14
Commissioner of sales tax v Mangal Sen Shyamlal 1975 (4) SCC 35 15
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd. 58 ITR 241 18
Empire Jute Co. Ltd. v CIT [1966] 57 ITR 36 18
Feroze N Dotivala v PM Wadhwani [(2003) 1 SCC 433] 15
Hutchinson v Turner 31 TC 495 14
John Smith v Moore (1921) 2 AC 13 14
Madras Ind Inv Corpn. v CIT 225 ITR 802 ............................................................................. 18
Maheshwari Devi Jute Mills v CIT [(1965)57 ITR 36] ........................................................... 19
Mersey v Lucas 2 TC 25 29 (HL) ............................................................................................ 14
Oberoi Hotels v CIT (2018) 409 ITR 132/304 CTR 988/169 DTR 179 (Cal) (HC) ............... 15
Port of London Authority v IR 12 TC 122 (CA) ...................................................................... 14
Shaw Wallace Ltd v DCIT [2001] 117 Taxman 192 (Calcutta) (Mag) .................................... 17
State of Kerala v Mathai Verghese [(1986) 4 SCC 746] ......................................................... 15
Taparia Tools v CIT 260 ITR 102 ........................................................................................... 19
Tata Consultancy Services v State of Andhra Pradesh [2004] 141 Taxman 132 .................... 16
Vikas Sales Corporation v CIT (1996) 4 SCC 433 .................................................................. 17
VSSV Meenakshi Achi v CIT [1966] 60 ITR 253 ..................................................................... 16
Yasha Overseas v Commissioner of Sales Tax and Others (2008 (5) TMI 43 SUPREME
COURT)............................................................................................................................... 16

[STATUTES]

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MEMORIAL on behalf of the APPELLANT

Finance Act 2017, Pt No 482 15

Income Tax Act 1961, s 28 12, 16

[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> accessed 12 February, 2022 12
‘Accounting for carbon credits’ <https://cleartax.in/s/accounting-for-carbon-
credit#:~:text=Carbon%20Emission%20Reduction%20(CER)%20is,to%20generate%20fut
ure%20economic%20benefits.&text=Thus%20the%20CER%20should%20be,cost%20or%
20net%20realizable%20value> accessed 12 February, 2022 17
‘An analysis of My Home power v CIT’ [2012] 27 taxmanncom 336 (ART) accessed 12
February, 2022 17
‘Capital gains on intangible assets’ <https://www.taxterminal.in/post/capital-gains-tax-on-
intangible-assets> accessed 12 February, 2022 16
‘Carbon credit a brief study’ <https://taxguru.in/corporate-law/carbon-credit-brief-
study.html#:~:text=green%20technology%20globally.-
,Disadvantages%3A,emission%20at%20some%20other%20place> accessed 12 February,
2022 13
‘Carbon Credit Definition’ <https://www.investopedia.com/terms/c/carbon_credit.asp>
accessed 12 February, 2022 12
‘Carbon credits capital or revenue’ [2013] 29 taxmanncom 243 (ART) accessed 12 February,
2022 19
‘Carbon trading how does it work’ <https://www.bbc.com/news/science-environment-
34356604> accessed 12 February, 2022 12
‘Distinction between capital and revenue receipt’ <https://taxguru.in/income-tax/distinction-
capital-revenue-receipt.html> accessed 12 February, 2022 14
‘Income from sale of carbon credits’ <https://taxguru.in/income-tax/income-sale-carbon-
credits-taxed-business-income.html> accessed 12 February, 2022 19
‘It is an income but not taxable’ [2017] 78 taxmanncom 149 (ART) 16
‘Pros and cons of carbon offsets’ <https://www.greenbiz.com/article/benefits-and-drawbacks-
carbon-offsets> accessed 15 February, 2022 12
‘Revenue receipt versus capital receipt’ <https://www.wallstreetmojo.com/capital-receipts-vs-
revenue-receipts/> accessed 12 February 2022 14

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MEMORIAL on behalf of the APPELLANT

‘Rules interpretation of statute’ <https://taxguru.in/corporate-law/rules-interpretation-

statutes.html> accessed 12 February, 2022 15
‘Want to understand carbon credits’
<https://www.forbes.com/sites/erikkobayashisolomon/2020/03/13/want-to-understand-
carbon-credits-read-this/?sh=594139c871a> accessed 12 February, 2022 12

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MEMORIAL on behalf of the APPELLANT

STATEMENT OF JURISDICTION

The counsel for the Appellant most respectfully showeth:

In the Special Leave Petition PCIT vs. M/s. Vulcan Energy Pvt. Ltd., the appellant has
approached the Supreme Court under article 136 of the Constitution of India, 1950, which
reads as:

(1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion, grant
special leave to appeal from any judgment, decree, determination, sentence or order in any
cause or matter passed or made by any court or tribunal in the territory of India

(2) Nothing in clause ( 1 ) shall apply to any judgment, determination, sentence or order
passed or made by any court or tribunal constituted by or under any law relating to the
Armed Forces.

The present memorandum sets forth the facts, contentions, and arguments in the
present case.

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MEMORIAL on behalf of the APPELLANT

STATEMENT OF FACTS

[ISSUE]
1. An appeal has been filed at the High Court of Judicature at Madras by the Principal
Commissioner of Income Tax against M/s. Vulcan Energy Pvt. Ltd., against the order dated
12.10.2017 passed by the ITAT, Chennai ‘D’ Bench in I.T.A No. 1321/Mds/2017 for the
AY 2010-11 under section 206A of the Income Tax Act, 1961. The substantial question of
law raised in the appeal was whether on the facts and circumstances of the case, the tribunal
is legally correct 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 tax?
[JUDGEMENT]

2. Insofar as substantial question of law is concerned, the question as to the manner in which
sale of carbon credit has to be treated, has already been considered by several High Courts
and it has been held that such receipts should be treated as a capital receipt and not taxable.
The judgement was finished by pointing out merely for completeness sake that the question
whether S.115BBG(subsequently introduced via Finance Act 2017 w.e.f 1.4.2018 to tax
sale of carbon credits at10%) will apply for previous AY’s is already dealt with in aforesaid
judgments holding it as prospective and further the court did not agree with the view
canvassed by Department that the very fact that carbon credits are now taxed in S.115BBG
somehow shows or implies that they have always been revenue in nature and not capital.
They did not see merit in the Revenue’s claim and dismissed the appeal.
[AFTERMATH]

3. The Income Tax Department filed a SLP before the Hon’ble Supreme Court of India against
the order of the Hon’ble Madras High Court passed in PCIT vs M/s. Vulcan Energy Pvt.
Ltd. Leave was granted by the Hon’ble SC and the case is posted for final hearing to deal
only with the following legal question raised by the Revenue: “Whether the HC was
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?”

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MEMORIAL on behalf of the APPELLANT

ISSUES RAISED

A. WHETHER THE HC WAS 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?

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MEMORIAL on behalf of the APPELLANT

SUMMARY OF ARGUMENTS

I.

It is submitted before the Hon’ble Supreme Court that The HC was 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 because firstly, Sale of Carbon
Emission Reduction (CER), also known as Carbon Credits is business in nature, secondly,
Carbon Credits cannot be classified as Capital Receipt since, these are revenue in nature,
thirdly, Amendment of S. 115BBG of Income Tax Act is mere clarification and not amendment
as Carbon Credits were already taxed. , fourthly, CERs can be taxed as intangible assets,
fifthly, Carbon Credits Cannot Be Classified As Capital Receipt Since, These Are Not Casual
And Non-Recurring In Nature and sixthly, 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

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MEMORIAL on behalf of the APPELLANT

ARGUMENTS ADVANCED

I. 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

[1.1] Sale of Carbon Emission Reduction (CER), also known as Carbon Credits is
business in nature.

[1.2] Carbon Credits cannot be classified as Capital Receipt since, these are revenue
in nature.

[1.3] Amendment of S. 115BBG of Income Tax Act is mere clarification and not
amendment as Carbon Credits were already taxed.

[1.4] CERs can be taxed as intangible assets as these are tradeable.

[1.5] Carbon Credits Cannot Be Classified as Capital Receipt Since, These Are Not
Casual and Non-Recurring In Nature.

[1.6] 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.

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MEMORIAL on behalf of the APPELLANT

[1.1] 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 v. Sir Kameshwar Singh2, 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
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

1
Income Tax Act 1961, s 28.
2
CIT v Sir Kameshwar Singh (1935) 3 ITR 305.
3
‘Pros and cons of carbon offsets’ <https://www.greenbiz.com/article/benefits-and-drawbacks-carbon-offsets>
accessed 15 February, 2022.
4
‘Carbon Credit Definition’ <https://www.investopedia.com/terms/c/carbon_credit.asp> accessed 12 February,
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> accessed 12 February,
2022.
6
‘Carbon trading how does it work’ <https://www.bbc.com/news/science-environment-34356604> accessed 12
February, 2022.
7
‘Want to understand carbon credits’ <https://www.forbes.com/sites/erikkobayashisolomon/2020/03/13/want-to-
understand-carbon-credits-read-this/?sh=594139c871a> accessed 12 February, 2022.

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MEMORIAL on behalf of the APPELLANT

else in this developing country8. 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 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

8
‘Carbon credit a brief study’ <https://taxguru.in/corporate-law/carbon-credit-brief-
study.html#:~:text=green%20technology%20globally.-
,Disadvantages%3A,emission%20at%20some%20other%20place> accessed 12 February, 2022.

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MEMORIAL on behalf of the APPELLANT

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 environment9. 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 body12. Where a publishing house produced certain publications
to assist a charitable association, and there 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.

[1.2] 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 receipt 14. 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.

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).
13
Hutchinson v Turner 31 TC 495.
14
‘Distinction between capital and revenue receipt’ <https://taxguru.in/income-tax/distinction-capital-revenue-
receipt.html> accessed 12 February, 2022.
15
‘Revenue receipt versus capital receipt’ <https://www.wallstreetmojo.com/capital-receipts-vs-revenue-
receipts/> accessed 12 February 2022.
16
John Smith v Moore (1921) 2 AC 13.

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MEMORIAL on behalf of the APPELLANT

(¶) 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.

[1.3] 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 position18. 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 provision19. Further, the rules of interpretation of amendments of a
statutory provision would equally hold good for interpretation of amendments of a
statutory rule20. 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 intended21.

(¶) It is pertinent to note that the Point No. 48.2 and 48.3 of Explanatory Provisions of
Finance Act, 201722 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

17
Oberoi Hotels v CIT (2018) 409 ITR 132/304 CTR 988/169 DTR 179 (Cal) (HC).
18
‘Rules interpretation of statute’ <https://taxguru.in/corporate-law/rules-interpretation-statutes.html> accessed
12 February, 2022.
19
Feroze N Dotivala v PM Wadhwani [(2003) 1 SCC 433].
20
State of Kerala v Mathai Verghese [(1986) 4 SCC 746].
21
Commissioner of sales tax v Mangal Sen Shyamlal 1975 (4) SCC 35.
22
Finance Act 2017, Pt No 482.

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MEMORIAL on behalf of the APPELLANT

income from transfer of carbon credits and to encourage measures to protect the
environment, such amendment of S. 115BBG23through 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.

[1.4] 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 assets24. 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”25. It has been
established in the above contentions that the CERs have market value and are
tradeable26. In Yasha Overseas v. Commissioner of Sales Tax and Others27, 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 Multi
Commodity 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 28 and Bharat Sanchar Nigam Ltd. v. Union of India29 the
criteria for defining intangible assets was explained, thus CERs were goods and capable
of trading30.

23
Income Tax Act 1961, s 115 (BBG).
24
Income Tax Act 1961, s 2 (14).
25
‘Capital gains on intangible assets’ <https://www.taxterminal.in/post/capital-gains-tax-on-intangible-assets>
accessed 12 February, 2022.
26
VSSV Meenakshi Achi v CIT [1966] 60 ITR 253.
27
Yasha Overseas v Commissioner of Sales Tax and Others (2008 (5) TMI 43 SUPREME COURT).
28
Tata Consultancy Services v State of Andhra Pradesh [2004] 141 Taxman 132.
29
Bharat Sanchar Nigam Ltd. v Union of India [2006] 282 ITR 273 (SC).
30
‘It is an income but not taxable’ [2017] 78 taxmanncom 149 (ART) accessed 12 February, 2022.

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[1.5] 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 flow31. 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 nature32. 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.33

(¶) In Tata Consultancy Services v. State of Andhra Pradesh34, 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, 196135. It is further submitted that the CERs
are akin to import entitlements36, the incentives in the form of carbon credit are given
by the government to avoid the use of fossil fuels in the industry37. 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 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.

31
Vikas Sales Corporation v CIT (1996) 4 SCC 433.
32
Shaw Wallace Ltd v DCIT [2001] 117 Taxman 192 (Calcutta) (Mag).
33
CIT v Kamal Behari Lal Singha [1971] 82 ITR 460 (SC).
34
ibid 21.
35
‘Accounting for carbon credits’ <https://cleartax.in/s/accounting-for-carbon-
credit#:~:text=Carbon%20Emission%20Reduction%20(CER)%20is,to%20generate%20future%20economic%2
0benefits.&text=Thus%20the%20CER%20should%20be,cost%20or%20net%20realizable%20value> accessed
12 February, 2022.
36
‘An analysis of My Home power v CIT’ [2012] 27 taxmanncom 336 (ART) accessed 12 February, 2022.
37
Apollo tyres v ACIT (Kochi) [2014] 47 taxmanncom 416 (Cochin - Trib).

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MEMORIAL on behalf of the APPELLANT

[1.6] 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. CIT38. 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 account39.

(¶) Thus, loom hours are neither capital nor revenue assets in the legal or commercial
sense40. 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
receipt41 in substitution of the profits which would have been made by working the
loom hour. Thereafter, in the decision of the Privy Council in Commissioner of Taxes
v. Nchanga Consolidated Copper Mines Ltd.42 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.

38
Empire Jute Co. Ltd. v CIT [1966] 57 ITR 36.
39
CIT v Soorajmal 181 ITR 340.
40
CIT v Jagatjit Industries Ltd 287 ITR 46 (2006) 204 CTR (Del) 428.
41
Madras Ind Inv Corpn. v CIT 225 ITR 802.
42
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd. 58 ITR 241.

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MEMORIAL on behalf of the APPELLANT

(¶) It is further submitted before this Hon’ble Court that though the decision of CIT v. My
Home Power43 was decided on the precedent of Maheshwari Devi Jute Mills44, 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 expenditure45 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 payer46.
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.47

43
CIT v My Home Power [(2014) 365 ITR 0082 (AP)]..
44
Maheshwari Devi Jute Mills v CIT [(1965)57 ITR 36].
45
Taparia Tools v CIT 260 ITR 102.
46
‘Income from sale of carbon credits’ <https://taxguru.in/income-tax/income-sale-carbon-credits-taxed-
business-income.html> accessed 12 February, 2022.
47
‘Carbon credits capital or revenue’ [2013] 29 taxmanncom 243 (ART) accessed 12 February, 2022.

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MEMORIAL on behalf of the APPELLANT

PRAYER

Wherefore, in the light of the facts of the case, issues raised, arguments advanced and
authorities cited, this Hon'ble Court may be pleased to:

DECLARE THAT THE HC 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.

And/or issue any other, order or direction in the interest of justice, equity and good
conscience.

This, the Counsel for the Appellant shall duty bound, forever pray.

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