TaxTMI 
TaxTMI 
2026 (8) TMI 1455
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....of ld. CIT(A) in deleting the addition made on account of sale of REC Bonds holding the same as capital receipts. Therefore, both appeals filed by the Revenue are decided by a common order for the sake of convenience. 3. Brief facts leading to the issues are that the assessee is engaged in the business of generation of power and having 02 Hydro Power Units, one situated at Village Tosh, Barsani, District-Kullu, Himachal Pradesh [Jirah Power Project] and the other at Village-Palchan, Tehsil Manali, District-Kullu, Himachal Pradesh [Beas Kund Power Project]. The return was filed for AY 2018-19 on 28.09.2018, declaring total income of INR 5,72,790/- after claiming deduction u/s 80IA of the Act on the income earned from generation of power of INR 5,81,26,259/- and book profit of INR 4,23,47,896/- was declared u/s 115JB of the Act. For AY 2020-21, the return of income was filed on 12.02.2021, declaring total income of INR 40,67,940/- after claiming deduction u/s 80IA of INR 5,63,32,786/- and book profit was declared of INR 5,19,00,557/-. The AO held that the assessee has earned income from trading of REC Bonds and since these bonds are not part of the income derived from the business....
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....ts ignoring the facts of the case that the RECs is not a byproduct of Hydro power? 2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in treating the RECs as Carbon Credits ignoring the facts that the RECs are generated by the Hydro Power Projects whereas the Carbon Credits are generated by using clean energy sources by any Industrial entities? 3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in treating the income from sale of RECs as income from business and profession received from Hydro Power receipts by ignoring decision of Hon'ble Punjab and Haryana High Court in the case of Liberty Shoes Ltd. V. CIT, Central Circle, Ludhiana [2007] 158 Taxman 340 (Punj. &Har.) wherein it has been held that the business of trading of products is not entitled to deduction under Section 801A as the same can't be held to be profits and gains derived from Industrial Undertaking? 4. The appellant craves leave to add, amend, modify, or withdraw any of the aforesaid grounds of appeal at any time before or during the course of the hearing." 6. Heard the contentions of both the....
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.... with no defects noted by the AO. Nature of RECS: RECs received are an entitlement granted for contributing to environmental protection. Such receipts are neither asset generated during business nor offshoots of business income. There is no direct expense or cost of production for obtaining RECs-they do not increase profits or represent compensation for goods or services sold. Nature of Receipt: As per the observations above, in light of REC's it is observes that: 1. These are incentives are in the nature of an entitlement received to improve word atmosphere reducing Carbon/ Heat and gases emissions and entitlement earned can, at best, be recorded as 'capital receipt' and cannot be taxed as the 'revenue receipt'. 2. The credits are for reduction of 'carbon footprint', these are not generated or created due to carrying on business instead they are accrued due to concerns of emission of 'greenhouse gases' which are primary polluters of environment. Thus, the amount received for 'Carbon Credits' has no element for profit and gain and it is not subjected to tax under any head of income and....
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.... 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. Thus, any sum received on account of carbon credit or protecting the environment is not included in the business income. 3. Satia Industries Ltd. vs. National Faceless Assessment Centre, New Delhi [2023] 151 taxmann.com 358 (Amritsar Trib.): The assessee claimed the transfer value of REC/ESCs in return under section 115BBG and paid tax. During the time of assessment, the assessee amended the claim and treated the income as capital receipt. The income is offshoot from environmental concern not from offshoot of business concern. The nature is fully related to environmental health. It is found that said income is capital in nature and not liable to tax under business income. The appellant has annexed a revised computation, reiterating that the sale of RECs should NOT be part of taxable business income and not be taken into account for MAT purposes. The appellant has also invoked the Supreme Court's observation in CIT v. Shelly Products (2003) 261 ITR 367 (SC) that income inadvertently or wr....
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....n it be included in the computation of Book Profits u/s 115JB for levy of MAT. Accordingly, this ground of appeal so raised by the appellant is allowed and the addition to made to the income of the appellant is deleted. It is accordingly directed that the computation of income of the appellant should be reworked by excluding the receipts from REC's from business income both for the purposes of Profits and Gains of Business or Profession and computation of Book Profits u/s 115JB. Resultantly, this ground of appeal is allowed. Other grounds of appeal so raised by the appellant are general in nature and does not need separate adjudication." 8. While reaching to the conclusion that the receipts from the sale of REC Bonds is capital receipt, ld. CIT(A) followed the judgement of the Hon'ble Andhra Pradesh High Court in the case of CIT vs My Home Power Ltd. reported in [2014] 46 taxmann.com 314 and Co-ordinate Bench of Jaipur Tribunal in the case of ACIT vs Ginni Global (P.) Ltd. reported in [2019] 109 taxmann.com 333 (Jaipur-Trib.) and M/s Satia Industries Ltd. reported in [2023] 151 taxmann.com 358. It is observed that in the case of Satia Industries Ltd. (supra....
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.... type of carbon credits are of voluntary nature & are regulated by independent body Verra which was founded in 2007 by environmental and business leaders who saw the need for greater quality assurance in voluntary carbon markets. (iv) The assessee company is dealing in a second type of carbon credits which are of voluntary nature and are not regulated by United Nations Framework Convention on climate change. 15.3. Basics of Renewable Energy Certificates Another way to help to reduce carbon footprints has been devised by giving credit to units generating electricity from biofuels [agriculture residue rice husk and wheat straw] as compared to fossil fuel [Diesel/ Coal] and it is a mechanism in giving incentive to the producers of electricity from Renewable Energy Sources. (i) The regulation has been put in place by the Central Electricity Commission [CERC] and the Renewable Energy Certificates are issued under the rules and regulation framed by a regulatory authority. The REC will be exchanged only in the Power Exchanges approved by CERC within the bank of a floor price and forbearance (Ceiling) price to be determined by CERC from time to time. 15.....
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....dit under any of the three modes is entitlement or accretion of capital and hence income earned on sales of these is a capital receipt. f) That credit under any above said modes of incentive is not an off shoot of business, but it is generated due to environmental concerns and no asset is generated in the course of business, but it is generated due to environmental concern and the credit for reducing carbon emission or greenhouse effect can be transferred to any other party to reduce carbon emission. 16. The assessee claimed the transfer value of REC/ESCs amounting to Rs. 17,77,26000/-in return under section 1115BBG and paid tax. During the time of assessment, the assessee amended the claim and treated the income as capital receipt. We relied on the orders My Home Power Ltd,(supra) and Maheshwari Devi Jute Mills Ltd, (supra)the income is offshoot from environmental concern not from offshoot of business concern. The nature is fully related to environmental health. We find that said income is capital in nature and not liable to tax under business income. 16.1. The next grievance is related the amendment of claim in assessment stage. The transfer value of RE....
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.... AYs 2015-16 & 2016-17 has held that "Sale of REC Bonds is capital receipt and is not includable in the book profit computed u/s 115JB of the Act." The relevant observations as contained in para 35 to 37 of the order are reproduced as under:- 35. "Considered rival submissions in the light of decisions relied upon and perused materials placed on record. Undisputedly, the assessee has set up a captive power plant for generating power. It generates powers by means of renewable energy using non-fossil fuel such as molasses. It is a fact on record that the assessee has received RECs issued by CERC. REC as referred, are basically issued to incentivize generation of power through renewable energy so as to reduce the effect of emissions, which impact clean environment and leads to global warming. Thus, if we apply the test of purposive interpretation, it can be seen that the object of REC and carbon credits are akin in nature and operate on similar underlying principles. Further, Section 115BBG of the Act specifically provides for taxation of 'carbon credits' and the term has been explicitly defined within the section itself. The legislative intent, therefore, is clear and confine....