Sale of REC/ Carbon Credits are Capital Receipt: ITAT Quashes Demand [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that income earned from the sale of Renewable Energy Certificates (RECs), also referred to as carbon credits, constitutes a capital receipt and is not taxable for Assessment Year (AY) 2017-18. The tribunal quashed the disallowance of a deduction of Rs. 12,27,384 claimed under Section 80IA of the Income Tax Act, 1961.

Mayur Dyechem Intermediates LLP (assessee), a firm operating a solar power plant, faced scrutiny for AY 2017-18. The assessee filed its income tax return on 02.09.2017, declaring a total income of Rs. 26,75,45,830.

The Assessing Officer (AO) observed that the assessee claimed a deduction of Rs. 3,60,646 under Section 80IA for income from its solar power plant, including Rs. 12,27,384 from the sale of RECs.

The AO disallowed the deduction for the REC income, arguing that it was related to carbon credits, a taxable receipt not eligible for deduction under Section 80IA as it was not derived from the eligible business of power generation.

Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the AO’s disallowance, confirming the addition of Rs. 12,27,384 to the assessee’s taxable income.

Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT. The counsel for the assessee argued that the sale of RECs constitutes a capital receipt, not taxable under the Income Tax Act for AY 2017-18.

The counsel submitted that RECs are issued by regulatory authorities to incentivize renewable energy producers for reducing carbon emissions, and their sale represents an entitlement for environmental conservation, not business income.

The assessee relied on several judicial precedents, including PCIT v. Gujarat Fluorochemicals Ltd, CIT v. My Home Power Ltd and Satia Industries Ltd. v. National Faceless Assessment Centre which held that income from carbon credits is a capital receipt.

The two-member bench, comprising Dr. BRR Kumar (Vice President) and Siddhartha Nautiyal (Judicial Member), observed that Satia Industries Ltd. had ruled that income from RECs is a capital receipt, not taxable, as it arises from environmental concerns rather than business operations.

The tribunal observed that RECs are incentives for reducing greenhouse gas emissions, issued under the Central Electricity Regulatory Commission (CERC) Regulations, 2010, and tradable on approved power exchanges.

The tribunal held that such income does not constitute business income under Sections 2(24), 28, 45, or 56 of the Act for AY 2017-18, as it is not a byproduct of business but an entitlement for environmental contributions.

The tribunal quashed the disallowance of Rs. 12,27,384, holding that the REC income is a non-taxable capital receipt. The appeal of the assessee was partly allowed.