ITAT Rules Sale of Carbon Credits as Non-Taxable Capital Receipt; Deletes Major Additions

SRF Limited challenged assessment orders for AYs 2011–12 and 2013-14, raising a host of issues ranging from transfer pricing adjustments on corporate guarantees given to overseas subsidiaries, disallowance under Section 14A, and denial of deduction for donations made to a school run for employees’ children.

The company also disputed the taxability of receipts from the sale of Carbon Credits (CERs) and the interest subsidy received under the Technology Upgradation Fund (TUF) Scheme, maintaining that both were capital in nature. In addition, SRF sought rectification of a computational mistake in its Section 10A deduction and claimed a Section 80-IA deduction that had been inadvertently omitted from the original returns.

Main Issue: Whether CER sale proceeds and TUF interest subsidy are capital receipts; whether a corporate guarantee fee of 0.25% satisfies the arm’s length standard; and whether appellate authorities can allow correction of computational errors or consider deduction claims missed in the return.

ITAT’s Ruling: The Delhi ITAT granted substantial relief to SRF by following settled decisions in the company’s own case. It held that income from sale of Carbon Credits is a capital receipt and cannot be taxed either under the normal provisions or while computing MAT under Section 115JB. The Assessing Officer was directed to exclude these receipts altogether.

The Tribunal upheld the 0.25% corporate guarantee fee as arm’s length, noting that the guarantees were backed by counter-guarantees from subsidiaries and bank quotations.

The Tribunal further held that genuine computational mistakes in Section 10A deduction cannot defeat a lawful claim and allowed the correction. Issues relating to the Section 80-IA deduction and verification of TUF subsidy for MAT purposes were sent back to the Assessing Officer for factual examination.

To Read Full Judgment, Download PDF Given Below