MEMORIAL on behalf of the RESPONDENT

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 RESPONDENT

TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................................... 2

INDEX OF AUTHORITIES...................................................................................................... 3

STATEMENT OF JURISDICTION.......................................................................................... 5

STATEMENT OF FACTS ........................................................................................................ 6

ISSUES RAISED ....................................................................................................................... 7

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? ...... 7

SUMMARY OF ARGUMENTS ............................................................................................... 8

ARGUMENTS ADVANCED ................................................................................................... 9

1. 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

1.1 Carbon credits are capital receipts and hence not taxable ....................................... 9

1.2 Section 115BBG will be applied prospectively ..................................................... 15

PRAYER .................................................................................................................................. 17

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MEMORIAL on behalf of the RESPONDENT

INDEX OF AUTHORITIES

[CASES]
PAGE NO.
Assistant Commissioner of Income Tax v Ginni Global (P.) Ltd. ITA No. 403 &
404/JP/2019 14
Atherion v British Insulated and Halsby Cables Ltd [1925] 10TC155 10
Cadell Weaving Mill Co. (P) Ltd. v Commissioner of Income Tax, 116 Taxman 77 12
CIT v Ambika Cotton Mills Ltd. (2021)433 ITR 193 14
CIT v Maheshwari Devi Jute Mills Ltd [(1965)57 ITR 36] 13
CIT v Shaw Wallace & Co [1931]2Comp. Cas. 276 11
CIT v Subhash Kabini Power Corporation Ltd. [(2016) 385 ITR 0592 (Karn.)] 14
Commissioner of Income Tax-IV v My Home Power Ltd. [(2014) 46 Taxmann.com 314 (Andhra
Pradesh) 13
Commissioner of sales tax v Mangal Sen Shyamlal 1975 (4) SCC 35 16
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd (1965) 58 ITR 241 ..... 10
Conocophillips Gulf of Paria B. V v Corporación Venezolana de Petróleo, S.A. ICC Case No.
22527/ASM/JPA Award [29 July 2019] 378 15
Feroze N Dotivala v PM Wadhwani [(2003) 1 SCC 433] 15
Hissein Habre v Republic of Senegal ECW/CCJ/JUD/06/10 Judgment 15
Hitendra Vishnu Thakur v State of Maharashtra (1994) 4 SCC 602] 15
Jt. CIT v Kalpataru Power Transmission Ltd. ITA Nos.1463/Ahd/2016 14
M/s. Perpetual Energy Systems Limited v Department of income tax 13
Mohd. Rashid Ahmad v State of U.P. [(1979) 1 SCC 596] 15
My Home Power Ltd. v CIT (2014) 385 ITR 82 (AP) 14
Perenco Ecuador Limited v Republic of Ecuador (Petroecuador) ICSID Case No. ARB/08/6
Interim Decision on the Environmental Counterclaim 15
S.P.Spinning Mills Pvt. Ltd. v ACIT [TCA.No.451 of 2018] 14
State of Kerala v Mathai Verghese [(1986) 4 SCC 746] 15
Subhash Kabini Power Corporation Ltd v CIT (ITAT Bangalore) 385 ITR 592 (Karn.) 13
Tuticorin Alkali Chemicals & Fertilizers Ltd. v CIT [1997] 227 ITR 172/93 12
Vodafone International Holdings v UOI [2009] 311 ITR 46 (Bom) 13

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MEMORIAL on behalf of the RESPONDENT

[STATUTES]

Income Tax Act 1961, s 2(24) 10, 12, 14, 16

[INTERNET SOURCES]

‘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 14
‘Capital gains in income’, <https://www.hostbooks.com/in/capital-gains-
income/#:~:text=Section%2045%20of%20Income%20Tax,which%20the%20transfer%20t
ook%20place> accessed 12 February, 2022 12
‘Carbon credits capital or revenue’ [2013] 29 taxmanncom 243 (ART) accessed 12 February
2022 14
‘Difference between capital and revenue expenditure’
<https://www.taxmann.com/post/blog/difference-between-capital-and-revenue
expenditure/#:~:text=1.1.,2%20Revenue%20Expenditure&text=If%20an%20expenditure
%20is%20made,the%20profits%20is%20revenue%20expenditure> accessed 12 February,
2022 10
‘Difference between capital and revenue expenditure’
<https://www.taxmann.com/post/blog/difference-between-capital-and-revenue-
expenditure/#:~:text=1.1.,-
2%20Revenue%20Expenditure&text=If%20an%20expenditure%20is%20made,the%20pro
fits%20is%20revenue%20expenditure> accessed 12 February, 2022 10
‘Rules interpretation of statute’ <https://taxguru.in/corporate-law/rules-interpretation-
statutes.html> accessed 12 February, 2022 15
‘Taxability of capital receipts’ <https://www.caclubindia.com/articles/taxability-of-capital-
receipts-41978.asp> accessed 12 February, 2022 11
‘Taxability of carbon credits’ <https://taxguru.in/income-tax/taxability-carbon-credits.html>
accessed 12 February, 2022 12
‘What is capital receipt’ <https://www.business-standard.com/about/what-is-capital-receipts>
accessed 12 February, 2022 10

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MEMORIAL on behalf of the RESPONDENT

STATEMENT OF JURISDICTION

The counsel for the Respondent most respectfully showeth:

In the Special Leave Petition PCIT v. 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 RESPONDENT

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 v. 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 RESPONDENT

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 RESPONDENT

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, Carbon credits
are capital receipts and hence not taxable and secondly, section 115BBG will be applied
prospectively.

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MEMORIAL on behalf of the RESPONDENT

ARGUMENTS ADVANCED

I. 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

(¶) 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, Carbon credits are capital receipts and hence not taxable and
secondly, section 115BBG will be applied prospectively.

1.1 CARBON CREDITS ARE CAPITAL RECEIPTS AND HENCE NOT TAXABLE
(¶) It is submitted before the Hon’ble Supreme Court that carbon credits are capital receipts
and hence they are not taxable and the same would be substantiated by firstly, that
carbon credits satisfy the test to be classified as capital receipts and distinguished from
a revenue receipt and does not form a part of the income and secondly, that carbon
credits are not an offshoot of the business and hence not taxable.

1.1.1 Carbon credits satisfy the test to be classified as capital receipts as distinguished from
a revenue reciept and does not form a part of the income.
(¶) It is submitted before the Hon’ble Court that any receipts of the government that
establishes liability and minimizes or reduces the financial assets can be classified as
capital receipts1. A capital receipt may be taxable as a capital gain but capital receipts

1
‘What is capital receipt’ <https://www.business-standard.com/about/what-is-capital-receipts> accessed 12
February, 2022.

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MEMORIAL on behalf of the RESPONDENT

are generally not taxable. However, for a capital gain to be taxable, there has to be
transfer of a capital asset. A capital asset is defined as any kind of property held by an
assessee, whether or not connected with business or profession of the assessee2 and is
used in or for the purposes of the business and not meant for sale in the ordinary course
of business of the enterprise3.

(¶) It is also submitted that the decided cases have, from time to time, evolved various tests
for distinguishing between capital and revenue expenditure but no test is paramount or
conclusive. There is no all-embracing formula which can provide a ready solution to
the problem; no touchstone has been devised. Every case has to be decided on its own
facts keeping in mind the broad picture of the whole operation in respect of which the
expenditure has been incurred. But a few tests formulated by the courts may be referred
to as they might help to arrive at a correct decision of the controversy between the
parties. One celebrated test is laid down by Lord Cave, L.C., in Atherion v. British
Insulated and Halsby Cables Ltd.4 where the learned law Lord stated:

(¶) When an expenditure is made, not only once and for all, but with a view to bringing
into existence an asset or an advantage for the enduring benefit of a trade, there is a
very good reason for treating such an expenditure as properly attributable not to
revenue but to capital. Asset or advantage of enduring nature means that it must not be
fully consumed or used up in the accounting period in which it is incurred5. This test,
as the parenthetical clause shows, must yield where there are special circumstances
leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner
of Taxes v. Nchanga Consolidated Copper Mines Ltd.6, it would be misleading to
suppose that in all cases, securing a benefit for the business would be prima facie capital
expenditure "so long as the benefit is not so transitory as to have no endurance at all".
There may be cases where expenditure, even if incurred for obtaining advantage of
enduring benefit, may, nonetheless, be on revenue account and the test of enduring

2
Income Tax Act 1961, s 2(14) (a).
3
‘Difference between capital and revenue expenditure’ <https://www.taxmann.com/post/blog/difference-
between-capital-and-revenue-expenditure/#:~:text=1.1.,-
2%20Revenue%20Expenditure&text=If%20an%20expenditure%20is%20made,the%20profits%20is%20revenu
e%20expenditure> accessed 12 February, 2022.
4
Atherion v British Insulated and Halsby Cables Ltd [1925] 10TC155.
5
‘Difference between capital and revenue expenditure’ <https://www.taxmann.com/post/blog/difference-
between-capital-and-revenue.
expenditure/#:~:text=1.1.,2%20Revenue%20Expenditure&text=If%20an%20expenditure%20is%20made,the%2
0profits%20is%20revenue%20expenditure> accessed 12 February, 2022.
6
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd (1965) 58 ITR 241 (PC).

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MEMORIAL on behalf of the RESPONDENT

benefit may break down. It is not every advantage of enduring nature, acquired by an
assessee that brings the case within the principle laid down in this test. What is material
to consider is the nature of the advantage in a commercial sense and it is only where
the advantage is in the capital field that the expenditure would be disallowable on an
application of this test. If the advantage consists merely in facilitating the assessee's
trading operations or enabling the management and conduct of the assessee's business
to be carried on more efficiently or more profitably while leaving the fixed capital
untouched, the expenditure would be on revenue account, even though the advantage
may endure for an indefinite future. The test of enduring benefit is therefore not a
certain or conclusive test and it cannot be applied blindly and mechanically without
regard to the particular facts and circumstances of a given case. But even if this test
were applied in the present case, it does not yield a conclusion in favour of the Revenue.
Here, by purchase of carbon credits hours no new asset has been created. There is no
addition to or expansion of the profit-making apparatus of the assessee. The income-
earning machine remains what it was prior to the purchase of carbon credits. The
assessee is merely enabled to operate the profit-making structure for a longer period of
time. It is, therefore, not possible to say that any advantage of enduring benefit in the
capital field was acquired by the assessee in purchasing carbon credits and the test of
enduring benefit cannot help the Revenue.

(¶) It is also submitted that the term "Income" has been defined under § 2(24) of the Act.
This definition begins with the wordings "Income includes” and provides a huge list of
various incomes. Therefore, it is an inclusive definition and not an exhaustive one. Such
a definition does not confine the scope of income but leaves room for more inclusions
within the ambit of term "Income"7. Referring to the judgment of the privy council in
CIT v. Shaw Wallace & Co 8, the term "income" is understood by the Apex Court as a
periodical monetary return "coming in" with some sort of regularity or expected
regularity from a definite source.

(¶) It is also submitted that while referring to the judgment of the Apex Court in Tuticorin
Alkali Chemicals & Fertilizers Ltd. v. CIT9, the term "capital receipt" was understood
by the Apex Court as an amount received on capital account, e.g. loss of capital or

7
‘Taxability of capital receipts’ <https://www.caclubindia.com/articles/taxability-of-capital-receipts-41978.asp>
accessed 12 February, 2022.
8
CIT v Shaw Wallace & Co [1931]2Comp. Cas. 276.
9
Tuticorin Alkali Chemicals & Fertilizers Ltd. v CIT [1997] 227 ITR 172/93 Taxman 502.

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MEMORIAL on behalf of the RESPONDENT

transfer of capital asset. The Apex Court explained the distinction between income and
capital receipt. Income is something which flows from the property. However, the
capital receipt is something received in place of a property. In view of this judgment of
the Apex Court, capital receipt does not form part of income within the meaning of §
2(24)10 of the Income-tax Act.

1.1.2 Carbon credits are not an offshoot of the business and hence not taxable.
(¶) It is also submitted that Hon'ble Bombay High Court had an occasion to deal with issue
relating to taxability of "Capital Receipts" in case of Cadell Weaving Mill Co. (P) Ltd.
11
v. Commissioner of Income Tax wherein Court has observed as under: "It is well
settled that capital receipts do not come within the ambit of the Income Tax Act except
to the extent of any capital receipt being expressly sought to be covered by the Act of
the Parliament". Therefore, the conclusion is that only those capital receipts would fall
within the meaning of "Income" which are expressly mentioned under § 2(24)12 of the
Income Tax Act. Income by way of capital gains are also included under this section. §
4513 of Income Tax Act, 1961 provides that any profits or gains arising from the transfer
of a capital asset affected in the previous year will be chargeable to income-tax under
the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the
previous year in which the transfer took place. But carbon credits are not taxable in
nature even though they can form a part of capital gain.14. This can be understood with
an explanation of what a carbon credit is. Carbon Credits is an incentive given to an
industrial undertaking for reduction of the emission of GHGs (Green House Gases),
including carbon dioxide which is done through several ways such as by switching over
to wind and solar energy, forest regeneration, installation of energy efficient machinery,
landfill methane capture, etc15. These credits are made available to the assessee on
account of saving of energy consumption and not because of its business. Further,
carbon credits cannot be considered as a bi-product. It is a credit given to the assessee
under the Kyoto Protocol and because of international understanding. Thus, the

10
Income Tax Act 1961, s 2(24).
11
Cadell Weaving Mill Co. (P) Ltd. v Commissioner of Income Tax 116 Taxman 77.
12
ibid 10.
13
Income Tax Act 1961, s 45.
14
‘Capital gains in income’ <https://www.hostbooks.com/in/capital-gains-
income/#:~:text=Section%2045%20of%20Income%20Tax,which%20the%20transfer%20took%20place>
accessed 12 February, 2022.
15
‘Taxability of carbon credits’ <https://taxguru.in/income-tax/taxability-carbon-credits.html> accessed 12
February, 2022.

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MEMORIAL on behalf of the RESPONDENT

assessees who have surplus carbon credits can sell them to other assessees to have
capped emission commitment under the Kyoto Protocol16..Through this we can
understand that carbon credit is not an offshoot of any business but an offshoot of
environmental concern. No asset is generated in the course of business but it is
generated due to environmental concerns.17

(¶) It is also submitted that the Supreme Court in the case of Vodafone International
Holdings v. UOI18 has held that treatment of any particular item in different manner in
the 1961 Act and DTC serves as an important guide in determining the taxability of
said item. Transferable carbon credit is not a result or incidence of one's business and
it is a credit for reducing emissions. The persons having carbon credits get benefit by
selling the same to a person who needs carbon credits to overcome one's negative point
carbon credit. The amount received is not received for producing and/or selling any
product, by-product or for rendering any service for carrying on the business. It can be
safely assumed that carbon credit is entitlement or accretion of capital and hence
income earned on sale of these credits is capital receipt.

(¶) It is also submitted that for this proposition, we can refer to the judgment of the Supreme
Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd19. wherein it was held that
transfer of surplus loom hours to other mill out of those allotted to the assessee under
an agreement for control of production was capital receipt and not income. Being so,
the consideration received by the assessee is similar to consideration received by
transferring of loom hours. The Supreme Court considered this fact and observed in
M/s. Perpetual Energy Systems Limited20, Hyderabad that taxability of payment
received for sale of loom hours by the assessee is on account of exploitation of capital
asset and it is capital receipt and not an income. Similarly, in the present case the
assessee transferred the carbon credits like loom hours to some other concerns for
certain consideration. Therefore, the receipt of such consideration cannot be considered
21
as business income and it is a capital receipt. In My home power ltd. , the Tribunal
held that carbon credit is in the nature of “an entitlement” received due to environmental

16
Subhash Kabini Power Corporation Ltd v CIT (ITAT Bangalore) 385 ITR 592 (Karn).
17
Commissioner of Income Tax-IV v My Home Power Ltd. [(2014) 46 Taxmann.com 314 (Andhra Pradesh).
18
Vodafone International Holdings v UOI [2009] 311 ITR 46 (Bom).
19
CIT v Maheshwari Devi Jute Mills Ltd [(1965)57 ITR 36].
20
M/s. Perpetual Energy Systems Limited v Department of income tax ITA No.1583/Hyd/14.
21
My Home Power Ltd. v CIT (2014) 385 ITR 82 (AP).

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MEMORIAL on behalf of the RESPONDENT

concerns and not related to business, these are capital receipts and not liable to taxation.
The tribunal further held that as per Guidance note on Accounting for Self-generated
CERs by the ICAI, CERs are inventories and intangible assets which are accounted for
valuation at a cost of Market Price, whichever is lower. As per provision to § 28(va)22
a sum received as compensation on account of measure taken to curb the use or
emission of substance that deplete the Ozone layer under the United Nations
Environment Programme is excluded from business income.23 Thus, any sum received
on account of carbon credit or protecting the environment is not included in the business
income24. Therefore, a thorough analysis of this case leads us to the conclusion that:

1. Carbon credit is entitlement or accretion of capital25. They are capital receipts and,
hence, income earned on sale of these credits is a capital receipt.

2. As income earned from carbon credits is capital receipt it cannot be taxed as a revenue
receipt.

3. Self-generated Certified Emission Reductions (CERs) are inventories of the generating

entities. They should be recognized in the books when they are created by UNFCCC
26
and/or are unconditionally available to the generating entity.

4. The CERs are intangible assets and should be accounted for as per AS-227 (Valuation
of inventories) at a cost or market price, whichever is lower.

5. Carbon credits are not generated or created due to carrying on business but are accrued
due to "world concerns"28. The amount is not received for producing and/or selling any
product, by-product or for rendering any service for carrying any business29.

22
Income Tax Act 1961, s 28.
23
Assistant Commissioner of Income Tax v Ginni Global (P.) Ltd. ITA No. 403 & 404/JP/2019.
24
CIT v Ambika Cotton Mills Ltd. (2021)433 ITR 193.
25
Jt. CIT v Kalpataru Power Transmission Ltd. ITA Nos.1463/Ahd/2016.
26
‘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.
27
‘Carbon credits capital or revenue’ [2013] 29 taxmanncom 243 (ART) accessed 12 February, 2022.
28
CIT v Subhash Kabini Power Corporation Ltd. [(2016) 385 ITR 0592 (Karn.)].
29
S.P.Spinning Mills Pvt. Ltd. v ACIT [TCA.No.451 of 2018].

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MEMORIAL on behalf of the RESPONDENT

1.2 SECTION 115BBG WILL BE APPLIED PROSPECTIVELY

(¶) It is submitted before the Hon’ble Apex Court that although international courts and
tribunals30 often refer to the principle of non-retroactive application of law31 as general
principle of law32, they rarely explain what precisely this principle entails. While laws
normally apply to the future (prospectively), they may also apply to the past
(retroactively), impacting actions or situations occurring before the law was enacted33.
Retroactive laws pose a challenge to the fundamental principles of equality, certainty
and predictability underlying the rule of law. In terms of taxation, retrospective tax
means giving effect to the amendment in the present law before the date on which the
changes were brought in. It taxes a transaction that took place prior to the law being
framed.

(¶) It is also submitted that In the matter of Hitendra Vishnu Thakur v. State of
Maharashtra 34
, the Hon’ble Supreme Court laid down the ambit and scope of an
amending Act and its retrospective operation as follows:

(¶) “A statute which affects substantive rights is presumed to be prospective in operation

unless made retrospective, either expressly or by necessary intendment, whereas a
statute which merely affects procedure, unless such a construction is textually
impossible35, is presumed to be retrospective in its application, should not be given an
extended meaning and should be strictly confined to its clearly defined limits.”

(¶) The Supreme Court held in Mohd. Rashid Ahmad v. State of U.P.36, perhaps no rule of
construction is more firmly established than this — that retrospective operation is not
to be given to a statute so as to impair an existing right or obligation other than as
regards the matter of procedure, unless that effect cannot be avoided without doing
violence to the language of the enactment37. If the enactment is expressed in a language
which is fairly capable of either interpretation38, it ought to be construed as prospective

30
Conocophillips Gulf of Paria B. V v Corporación Venezolana de Petróleo, S.A. ICC Case No. 22527/ASM/JPA
Award [29 July 2019] 378.
31
Perenco Ecuador Limited v Republic of Ecuador (Petroecuador) ICSID Case No. ARB/08/6 Interim Decision
on the Environmental Counterclaim [11 August 2015] 357.
32
Hissein Habre v Republic of Senegal ECW/CCJ/JUD/06/10 Judgment [18 November 2010].
33
‘Rules interpretation of statute’ <https://taxguru.in/corporate-law/rules-interpretation-statutes.html> accessed
12 February, 2022..
34
Hitendra Vishnu Thakur v State of Maharashtra (1994) 4 SCC 602].
35
Feroze N Dotivala v PM Wadhwani [(2003) 1 SCC 433].
36
Mohd. Rashid Ahmad v State of U.P. [(1979) 1 SCC 596].
37
State of Kerala v Mathai Verghese [(1986) 4 SCC 746].
38
Commissioner of sales tax v Mangal Sen Shyamlal 1975 (4) SCC 35.

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MEMORIAL on behalf of the RESPONDENT

only. But where, as here, it is expressly stated that an enactment shall be retrospective,
the courts will give it such an operation. It is obviously competent for the legislature in
its wisdom, to make the provisions of an Act of Parliament retrospective.”

(¶) It is therefore submitted that the in the present case since the AY is that of 2010-11 and
the § 115BBG of Income Tax Act39 was introduced in the year 2017, with effect from
2018, this section cannot be applied retrospectively in this present case. It can only be
applied prospectively and therefore Vulcan Energy Pvt. Ltd. will not be taxed over the
sale of carbon credits.

39
Income Tax Act 1961, s 115 (BBG).

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MEMORIAL on behalf of the RESPONDENT

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 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 Respondent shall duty bound, forever pray.

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