2026 (3) TMI 388 - AT - Income Tax

Taxation of Renewable Energy Certificates: REC proceeds are not carbon credits for concessional tax and not eligible for power-business deduction.

Income from sale of Renewable Energy Certificates (RECs) does not fall within the statutory meaning of 'carbon credits' for concessional taxation because ... Income from sale of Renewable Energy Certificates (RECs) - taxable at the concessional rate u/s 115BBG - deduction u/s 80IA on income from the sale of RECs - Scope of definition of “carbon credit” Entitlement of the assessee firm for taxing the income from RECs at a concessional tax rate contemplated under section 115BBG of the Act, i.e., @ 10% - HELD THAT: - Section 115BBG confers a concessional tax treatment only for income by way of transfer of 'carbon credits', which the Explanation expressly defines as reduction of one tonne of carbon dioxide emissions (or equivalent gases) validated by the United Nations Framework on Climate Change and tradable in the market. RECs, by contrast, represent one MWh of electricity generated from renewable sources and injected into the grid, are issued under the Electricity Act, 2003 and CERC regulations, and are neither validated under the UNFCCC mechanism nor the statutory concept of reduction of one tonne of CO2 (or equivalent) as defined in the Explanation to section 115BBG. Where a concessional rate is provided, the provision must be strictly construed and cannot be extended to instruments that do not satisfy the statutory definition even if both relate broadly to environmental objectives. Accordingly, RECs do not fall within the definition of 'carbon credit' for the purpose of section 115BBG and the concessional rate is inapplicable. [Paras 9, 10, 11, 13, 14] Income from sale of RECs cannot be taxed under the concessional scheme of section 115BBG. Alternate contention of the Ld. AR that if the income from the sale of RECs is to be treated as business income, then the same would qualify for deduction u/s 80IA - deduction in respect of profits “derived from” the eligible business of generation of power - HELD THAT: - Section 80IA permits deduction in respect of profits 'derived from' the eligible business of generation of power, a phrase which the Supreme Court has interpreted to require a direct and first-degree nexus between the income and the business activity. Receipts from sale of RECs arise from trading of environmental attributes and, although attributable to the electricity business in a broad sense, do not satisfy the stricter test of being directly and primarily 'derived from' the generation or sale of electricity. Therefore, the REC receipts do not qualify for the section 80IA deduction. [Paras 15] The claim for deduction under section 80IA qua REC receipts is rejected. Final Conclusion: The Tribunal dismissed the assessee's appeal: income from sale of RECs is neither taxable at the concessional rate under section 115BBG nor eligible for deduction under section 80IA for AY 2020-21. Issues: (i) Whether income from sale of Renewable Energy Certificates (RECs) is taxable at the concessional rate under Section 115BBG of the Income-tax Act, 1961; (ii) Whether, alternatively, such income qualifies for deduction under Section 80IA of the Income-tax Act, 1961.Issue (i): Whether income from sale of RECs falls within the meaning of 'carbon credits' for the purposes of Section 115BBG of the Income-tax Act, 1961 and is taxable at the concessional rate of 10%.Analysis: Section 115BBG applies only to income by way of transfer of 'carbon credits' as defined in the Explanation, meaning reduction of one tonne of carbon dioxide emissions or equivalent gases validated by the United Nations Framework on Climate Change (UNFCCC) and tradable in the market. RECs represent one MWh of electricity generated from renewable sources issued under the Electricity Act, 2003 and CERC regulations, and are not validated under the UNFCCC mechanism nor represent the statutory definition of reduction of one tonne of CO2 emissions as required by the Explanation to Section 115BBG. Concessional tax provisions must be strictly construed and cannot be extended to distinct instruments merely on broad environmental policy similarity.Conclusion: Income from sale of RECs is not taxable under Section 115BBG of the Income-tax Act, 1961; the concessional rate under Section 115BBG does not apply in favour of the assessee.Issue (ii): Whether income from sale of RECs, if treated as business income, qualifies for deduction under Section 80IA of the Income-tax Act, 1961.Analysis: Section 80IA permits deduction for profits 'derived from' the eligible business of power generation, which requires a direct and first-degree nexus between the income and the business activity. Income from sale of RECs arises from trading in environmental attributes and is not directly derived from the generation or sale of electricity. The stricter 'derived from' test precludes treating REC sale proceeds as profits eligible for Section 80IA deduction.Conclusion: Income from sale of RECs does not qualify for deduction under Section 80IA of the Income-tax Act, 1961; the claim is rejected.Final Conclusion: The appeal is dismissed; the tax treatment adopted by the revenue authorities is upheld and the assessee is not entitled to tax RECs under Section 115BBG nor to deduction under Section 80IA.Ratio Decidendi: Section 115BBG is confined to transfers of UNFCCC-validated carbon credits as statutorily defined, and Section 80IA requires a direct first-degree nexus such that proceeds from trading environmental attributes (RECs) are not deductible as profits 'derived from' power generation.