INCOME TAX OFFICER, NEW DELHI vs. KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD, SHIMLA

आयकर अपीलीय अिधकरण, िद�ी पीठ�, नई िद�ी INCOME TAX APPELLATE TRIBUNAL DELHI “E” BENCHES, NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA 7818 & 7819/DEL/2025 िनधा�रण वष�/Assessment Year: 2018-19 & 2020-21) INCOME TAX OFFICER, KAPIL MOHAN AND ASSOCIATES HYDRO POWER WARD 14(1) PVT. LTD. ROOM NO. 210, CR BUILDING, HOUSE NO. 99, SECTOR 3, NEW Vs. IP ESTATE, NEW DELHI-110002 SHIMLA, SHIMLA-171009, HIMACHAL PRADESH अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of Assessee: AACCK5883C

अपीलाथ� �ारा/Appellant represented by: Sh. Raghunath, CIT DR. ��थ� �ारा/Respondent represented by: Sh. Sumit Nagpal, Adv.

सुनवाई की तारीख / Date of conclusion of hearing: 22-June-2026 घोषणा की तारीख / Date of pronouncement: 12-Aug-2026 आदेश / ORDER PER MANISH AGARWAL, AM :

The captioned appeals are filed by Revenue against the separate orders, both dated 26.09.2025 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 01.03.2021 passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act and assessment order dated 23.09.2022 passed u/s 143(3) r.w.s. 144B of the Act pertaining to Assessment Years 2018-19 and 2020-21 respectively.

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. 2. From the perusal of the Grounds taken by the Revenue in the Appeal Memo, it is observed that all the Grounds of appeal taken in both the Assessment Years are identical where the Revenue has challenged the action 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.

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. not be included even in the book profit u/s 115JB of the Act and accordingly both the appeals were allowed in favour of the assessee.

ITA No.7818/DEL/2025 [Assessment Year: 2018-19)

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. 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.”

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. During the year, the appellant disclosed an income of Rs.15,21,93,000 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 801A 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. 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

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. 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 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 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

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. 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. 15,21,93,000 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 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.”

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. 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) for AY 2018-19, the Co-ordinate Bench of Amritsar Tribunal has discussed this issue at length and has further commented upon the nature and the receipts from Carbon credits vs REC Bonds vs ESCS and thereafter, reached to the conclusion that the sale of REC Bonds is capital in nature. The relevant extract of the observations of the Co-ordinate Bench as contained in para 15 & 16 are as under:-

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. assessee reducing such emissions under the Kyoto Protocol and because of international understanding. (iii) The second 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. 15.4. Basics of ESCERTs The Perform Achieve and Trade (PAT) is a market-based mechanism to reduce the specific energy consumption in energy intensive industries. This is facilitated through the trading of ESCERTs which are issued to those plants who have overachieved their targets. Those plants who were under achievers of their targets are entitled to purchase ESCERTsfor the trading of ESCERTs, Central Electricity Regulatory Commission (CERC) is the Market Regulator and Bureau of Energy Efficiency is the Administrator. 15.5. Common Features: For treating them as capital receipts not liable to tax a) That all the above stated three modes of 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’. b) The credits in all the three modes of reduction of ‘carbon footprint’ are not generated or created due to carrying on business to this accrued due to concern of the word to improve 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. [The taxability of Carbon Credits stands changed w.e.f. AY 2018- 19]

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. c) Further the credits under all the above stated modes of 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. d) Moreover, transferable credits of all the three modes of 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. e) The amount is not received, in any of the modes of incentive, 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. 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 REC/ESCs amounting to Rs.17,77,26000/- was duly claimed as capital receipt in assessment stage. We respectfully relied on the order of Hon’ble Apex Court in the case of Goetze (India) Ltd & the order of the Hon’ble Calcutta High Court in the case of Ankit Metal & Power Ltd. Both the orders have not impinged the power of ITAT u/s 254 to allow the claim duly amended by assessee after filing the return. Accordingly, the revised claim made by the assessee during the time of assessment is duly accepted. We set aside the order of ld. CIT(A) and restore the claim of assessee. 16.2. The commission paid by the assessee amount to Rs.4,57,332,318/- was treated as bogus and added back U/s 69C. The addition was cropped up by the recommendation of the ld. DRP. The ld. DRP issued the SCN for enhancement, through e-mail, for the first time on 27th June, 2022 and the assessee was allowed time up to 28.06.2022 to respond

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. to the same and the order making enhancement was passed by the DRP on 29.06.2022. The grievance of the assessee is that the ld. DRP has acted beyond jurisdiction U/s 144C(8) of the Act. The ld. AR placed the explanatory note of the Finance Bill 2021.After submission of requisite documents as evidence of transaction, the ld. DRP had not considered the same. Considering the submission of assessee the Tax Invoice, transaction through bank account and the TDS certificate are duly placed before the bench as proof of transaction with M/s Zylo International. The ld. DR has not made any objection about assessee’s submission and not able to submit any contrary judgment against the assessee. It is pertinent to mention the revenue was not able to submit any transaction with M/s Rolmex International Prop. Jaswant Singh with the assessee. The addition cannot be on basis of surmises and conjectures. We respectfully relied on the order of Hon’ble Apex Court Umacharan Shaw & Bros(supra). In our considered view the addition amount to Rs. 4,57,332,318/- is quashed.”

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. taxing statute are required to be construed strictly. In view of the established principle of strict interpretation of taxing statutes, REC and carbon credits cannot be treated as synonymous and must be considered separately for the purpose of taxation. 36. Thus, in our view, the decisions cited by learned counsel for the assessee and more particularly, the decisions of the Coordinate Benches discussed hereinabove, clearly support the case of the assessee that the receipts from RECs are not in the nature of revenue receipt. Therefore, we hold that the amounts received by the assessee from sale of RECs, being in the nature of capital receipts, are not taxable at the hands of the assessee. 37. With regard to the issue of whether the receipts from RECs, being in the nature of capital receipts, will form part of book profit computed under section 115JB of the Act. We hold that respectfully following the ratio laid down by Coordinate Bench, as aforesaid, the receipts from sale of RECs, being in the nature of capital receipts, should be excluded for the purpose of computing book profit under section 115JB of the Act. Grounds 10 to 12 of the assessee are allowed accordingly.”

ITA 7819 & 7818/DEL/2025 KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD. 11. In the result, both the appeals filed by the Revenue in ITA Nos. 7818 & 7819/Del/2025 for Assessment Years 2018-19 & 2020-21 respectively, are dismissed.

Order pronounced in the open Court on 12.08.2026.

Sd/- Sd/- (MAHAVIR SINGH) (MANISH AGARWAL) VICE PRESIDENT ACCOUNTANT MEMBER Date- 12.08.2026 *Amit Kumar, Sr. P.S*

Copy to: INCOME TAX OFFICER, WARD 14(1), ROOM NO. 210, CR BUILDING, IP ESTATE, 1 DELHI, NEW DELHI-110002, DELHI

KAPIL MOHAN AND ASSOCIATES HYDRO POWER PVT. LTD., 2 HOUSE NO. 99, SECTOR 3, NEW SHIMLA, SHIMLA-171009, HIMACHAL PRADESH

3 THE PCIT / CIT, 4 THE D.R., ITAT, DELHI BENCH 5 GUARD FILE TRUE COPY

ASSISTANT REGISTRAR / SR. PRIVATE SECRETARY I.T.A.T., DELHI