Sale of Renewable Energy Certificates Not Taxable: ITAT Ahmedabad

Mayur Dyechem Intermediates LLP Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that income from the sale of Renewable Energy Certificates (RECs) by Mayur Dyechem Intermediates LLP for AY 2017-18 is a capital receipt and not taxable. Tribunal partly allowed the appeal and restored depreciation claims for CIT(A) adjudication.

Background:
Mayur Dyechem Intermediates LLP (“the assessee”) filed its income tax return for Assessment Year 2017-18 declaring a total income of ₹26.75 crore. The assessee claimed deductions under Section 80IA of the Income Tax Act, 1961, for income from solar power plants and included income from the sale of Renewable Energy Certificates (RECs). The Assessing Officer (AO) disputed the claim, treating the sale of RECs as taxable business income rather than eligible for deduction, and disallowed part of partner remuneration and depreciation claimed on solar assets.

The assessee appealed to the CIT(A), who largely upheld the AO’s order. The matter was further appealed to the Income Tax Appellate Tribunal (ITAT), Ahmedabad.

Key Issues and Tribunal Findings

1. Taxability of Income from Sale of RECs / Carbon Credits (Grounds 1 & 2)

• AO’s View: Income from RECs (₹12.27 lakh) was added to total income, as it was not clear whether it qualified as business income under Section 80IA. The AO treated RECs as taxable receipts from sale of carbon credits.
• Assessee’s Argument: Sale of RECs is a capital receipt, as RECs are incentives granted by regulatory authorities for generating renewable energy. They are not income derived from regular business operations. Additionally, Section 115BBG, which specifically taxes carbon credits, was prospective from 01.04.2018 and thus not applicable to AY 2017-18. Alternatively, if considered revenue, income from RECs is directly linked to power generation and eligible for deduction under Section 80IA.

Tribunal Analysis:

• The ITAT examined the nature of RECs, carbon credits, and ESCERTs: all are entitlements issued for environmental contribution and not generated as by-products of business.
• Judicial Precedents Considered:
  • PCIT v. Gujarat Fluorochemicals Ltd. [2023]
  • CIT v. My Home Power Ltd. [2014] 365 ITR 82 (AP)
  • CIT v. Subhash Kabini Power Corporation Ltd. [2016] 385 ITR 592 (Karnataka)
  • Essel Mining & Industries Ltd. v. DCIT [2022]
  • Satia Industries Ltd. vs NFAC, New Delhi [2023] 202 ITD 189 (Amritsar Trib.) – held income from RECs/ESCs is a capital receipt.
• ITAT noted that RECs are tradable on approved power exchanges and issued to incentivize environmental conservation, not as a profit-making activity.
• Conclusion: Income from sale of RECs qualifies as a capital receipt and is not taxable for AY 2017-18.
• As this decision resolved the issue, the Tribunal did not consider the alternative claim for Section 80IA deduction.

2. Disallowance of Partner Remuneration (Grounds 3 & 4)

• AO’s View: Partners’ remuneration (₹3.80 lakh) should be apportioned to income claimed under Section 80IA. Since the solar unit generated income without expenses claimed against it, a proportionate amount of remuneration was disallowed.
• Assessee’s Argument: Solar business operations were automated under a power purchase agreement with the Discom. Operation and maintenance were outsourced, and the business did not require partner involvement; thus, no apportionment of remuneration was necessary. Reliance was placed on:
  • DCIT v. Hira Ferro Alloys Ltd. [2018]
  • ACIT v. P.I. Industries [2012]

Tribunal Findings:

• ITAT held that remuneration to partners is payable in relation to the business as a whole, including units claiming exemption under Section 80IA.
• The AO’s and CIT(A)’s reasoning was upheld: it is unreasonable to assume the unit would generate income entirely without partner involvement.
• Disallowance of ₹3.80 lakh was upheld.

3. Disallowance of Depreciation on Solar Building and Machinery (Ground 5)

• Depreciation claimed on solar building and machinery amounted to ₹3.25 lakh.
• CIT(A) did not adjudicate this ground.
• ITAT restored the matter to CIT(A) for fresh adjudication.

4. Other Grounds (Interest and Penalty under Sections 234B/C and 270A)

• Not argued before the Tribunal; therefore, dismissed as not pressed.

Tribunal’s Decision

• Partly Allowed Appeal:
  • Allowed: Income from sale of RECs treated as capital receipt – not taxable.
  • Dismissed: Disallowance of partner’s remuneration upheld.
  • Depreciation on solar building/machinery restored to CIT(A) for adjudication.
  • Other grounds dismissed as not pressed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD