Income Tax Officer vs Kapil Mohan & Associates Hydro Power Pvt. Ltd.

1.

Whether, the Ld. CIT(A) was justified in deleting the addition made by the AO on account sale of RECs and showing the same as business receipts 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. And 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.

Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in directing the AO to recalculate the deduction us 801A of the Act by ignoring the facts that the income of Rs.3,30,60,008 is not directly linked to the receipts of power generation i.e. business of the assessee?

5.

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.”

“Decision:

I have carefully considered the facts of the case, the findings of the AO, the written submissions of the appellant, and the judicial precedents cited. The issue is adjudicated as under:

The appellant is engaged in the business of generation of electricity from renewable energy resources in Himachal Pradesh. For the assessment year under appeal, the appellant opted to sell electricity to the Himachal Pradesh State Electricity Board (HPSEB) through a Short-Term Agreement under the REC Mechanism and was, accordingly, entitled to receive Renewable Energy Certificates (RECs) under regulatory guidelines.

During the year, the appellant disclosed an income of Rs.1,46,19,959/- from sale of RECs in its Profit and Loss Account and as per written submissions the appellant is claiming this as a capital receipt, not liable to tax.

The Assessing Officer (AO) however treated the receipt as revenue as in the ITR of the appellant the same was disclosed as revenue receipt and included it in the computation of business profits, denied benefit under section 80IA in respect of this income.

As per appellant’s submissions it is observed as under:

Nature of Activity:

The appellant’s activity of generating power from renewable energy aids in reducing carbon emissions and greenhouse gases. Complete and audited books of accounts are maintained with no defects noted by the AO.

HPSEB Policy:

Under the policy of HPSEB, the appellant had the option to enter into either a Long¬Term Agreement (Rs.2.95/unit) or Short-Term Agreement (Rs.2.43/unit plus RECs) for sale of power. For the year under review, the appellant opted for the latter.

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 it is not liable for tax in terms of section 2(24),28,45 & 56 of the Income Tax Act, 1961.

3.

Further these credits for reduction of carbon footprints cannot be considered as by-products because credit is given to the assessee to help the reduction in emission of greenhouse gases and the assessee, who has surplus under any of the three schemes can sell them to another assessee.

4.

Moreover, transferable incentive does not result into and are not incidence of one’s business and these are credit for reducing emission. The person having credits under any of the above stated schemes get benefited by selling the same to persons who needs to offset carbon footprint because of one’s negative points under any of the modes of incentives.

5.

The amount is not received, by producing or selling any product, by-product or rendering any services for carrying on the business and the credit under any of the three modes is entitlement or accretion of capital and hence income earned on sales of these is a capital receipt.

6.

That credit 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.

The issue under consideration is no more res-judicata, whereas the same has been adjudicated in various judicial pronouncements which are being discussed hereunder:

1.

In Commissioner of Income-tax - IV vs. My Home Power Ltd. [2014] 46 taxmann.com 314 (Andhra Pradesh): Where assessee, engaged in business of power generation, received carbon credits for project activity of switching off fossil fuel from naphtha and diesel to biomass, carbon credits not being linked with power generation, amount received on their transfer did not have element of profit or gain and it was not taxable.

2.

Assistant Commissioner of Income Tax vs. Ginni Global (P.) Ltd. [2019] 109 taxmann.com 333 (Jaipur - Trib.): The Commissioner (Appeals) has followed the decision of Jurisdictional High Court in case of Rajasthan State Mines & Minerals Ltd. (supra). No contrary decision had been brought on record. Further as per proviso to section 28(va) 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. 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 invoked the Supreme Court’s observation in CIT v. Shelly Products (2003) 261 ITR 367 (SC) that income inadvertently or wrongly offered to tax, but not taxable, can be claimed as exempt and should be excluded from total income.

After careful perusal of Written submissions of the appellant, Policies of the Himachal Pradesh State Electricity Board, Copies of agreements and supporting documents, Assessment Order and case records and cited judicial precedents it is observed as under:

RECs are granted under statutory and regulatory mandates exclusively for the purpose of incentivizing generation of clean energy. The grant of RECs is not for carrying out business activity per se, but an entitlement in recognition of the environmental benefit provided by the generator. These are not generated out of any additional business expense or activity, nor do they result from the sale of goods or services.

The weight of Judicial Authority, as relied by the appellant, supports the treatment of carbon credits and similar entitlements as capital receipts, not taxable as business profits or under any other head of income.

There is no allegation or finding in the order of the AO that the RECs are an integral part of business profits or that the appellant incurred any separate cost for earning these certificates. These are rewards for environmental compliance, not derived from the appellant’s trading or operational activity.

The purpose of MAT is to tax profits and gains of business. Since RECs are held to be capital receipts, not taxable under normal provisions, the profit shown in the Profit and Loss Account should be reduced to exclude such non-taxable capital receipts while calculating the book profit under section 115JB, as mandated by law and supported by cited case law.

The Apex Court has clarified that any amount not taxable as income or exempt, but included in return or assessed, can be excluded during assessment or appellate proceedings, and corresponding excess tax paid can be refunded.

In view of the detailed submissions, factual background, documentary evidence, and binding judgments cited above, it is held that the sum of Rs. 1,46,19,959/- received by the appellant as consideration for sale of Renewable Energy Certificates (RECs) is in the nature of a capital receipt and not a revenue receipt/business income accordingly, such sum cannot be brought to tax under the head “Profits and Gains of Business or Profession” nor can 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 as 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.”