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Facts
The assessee company filed a return declaring Nil income. The Assessing Officer completed the assessment at Rs. 6,32,43,820/- after making additions, including disallowance of deduction under Section 80IA for REC certificates, insurance claim, and interest income. The CIT(A) partly allowed the appeal, deleting the disallowance for REC certificates and interest income, but upholding the disallowance for insurance claim.
Held
The Tribunal held that income from REC certificates is an integral part of the consideration for the sale of electricity and thus eligible for deduction under Section 80IA. Similarly, interest income earned on fixed deposits maintained as margin money for a loan taken to purchase plant and machinery, for which interest expense was allowed, is also considered to have a direct nexus with the eligible business activity. The disallowance of deduction for these items was deleted.
Key Issues
Whether income from Renewable Energy Certificates (REC) and interest income on fixed deposits maintained for securing business loans are eligible for deduction under Section 80IA as profits derived from the eligible business.
Sections Cited
80IA, 143(3), 144B
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Income Tax Appellate Tribunal, “B” BENCH, DELHI
Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL
O R D E R PER ANUBHAV SHARMA, JM:
This appeal is preferred by the assessee against the order dated 15.10.2024 of the Ld. National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’)
P a g e | KC India Ltd. (AY: 2018-19) in DIN & Order No.: ITBA/NFAC/S/250/2024-25/1073250510(1) arising out of the order dated 12.08.2021 u/s 143(3) r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the NaFAC for AY: 2018-19.
2. A return of Income for A.Y. 2018-19 was filed by the assessee on 30.09.2018 declaring total income at Nil. Assesseefurther filed revised return on 08.03.2019, declaring income at Rs. Nil. The return of income was processed u/s 143(1) of I.T. Act, 1961 determining total income at Rs. 3,80,460/-. The case of the assessee was selected for "Complete" Scrutiny under "CASS". Subsequently, the assessment was completed u/s 143(3) r.w.s. 144B of the Act on assessing total income at Rs. 6,32,43,820/- after making following disallowance/additions: i. Disallowance of deductionof Rs. 5,64,43,387/- u/s 80IA stating that the income from REC Certificates does not have first degree nexus with the eligible business. ii. Disallowance of Rs. 38,82,173/- of deduction u/s 80IA on account of Insurance claim received.
P a g e | KC India Ltd. (AY: 2018-19) iii. Disallowance of Rs. 25,37,807/- of deduction u/s 80IA on account of interest income.
3. The Ld.CIT(A), NFAC has partly allowed the appeal of the assessee. The Ld. CIT(A) deleted the addition of Rs. 5,64,43,387/-on account of disallowance of deduction u/s 80IA confirmed the addition of Rs. 38,82,173/- on account of Insurance claim received u/s 80IA and deleted the disallowance of Rs.25,37,807/- on account of interest received u/s 80IA. The department is in appeal raising following grounds; i. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of deduction of Rs. 5,64,43,387/- u/s 80IA of the Act. ii. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of deduction of Rs. 5,64,43,387/- u/s 8OIA of the Act ignoring the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. Vs CIT 262 ITR 278 and in the case of Camby Electric Supply Industrial Company Ltd. Vs CIT 113 ITR 84 explicitly held that once expression "derived from" is used by the legislature then only profit from a particular business undertaking are eligible for the deduction and not all kinds of profits are eligible profits. iii. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of deduction of Rs. 5,64,43,387/- u/s SOIA ignoring the decision of the Hon'ble Supreme Court in the case of Liberty India Vs CIT wherein it has been held that only the first-degree income is eligible for deduction under chapter VI-A and the second degree of income generated cannot be held to be derived from the eligible business.
P a g e | KC India Ltd. (AY: 2018-19) iv. Whether on the facts and circumstances of the case, the Ld. CIT (A) erred in deleting the disallowance of Rs. 25,37.807/- of deduction u/s 8OIA on interest income from fixed deposits ignoring the fact that interest income on the fixed deposits does not have direct or proximate relation with eligible activity for deduction u/s 80IA of the Act. v. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs. 25,37,807/- of deduction u/s 80IA on interest income from fixed deposits ignoring the decision of the Hon'ble Apex Court in the case of M/s Conventional Fasteners vs. CIT 2018-TOIL-2002-SC-IT. vi. The appellant craves to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.
Wehave considered rival contentions and specially the written submission filled by ld. DR, which are extracts of summary repot of the appeal recommendation.
5. Ground no. 1 to 3 concern the disallowance of deduction of Rs. 5,64,43,387/- u/s 80IA made by the ld. AO alleging income from Renewable Energy Certificates (REC) does not have first degree nexus with the eligible business.Ld. CIT(A) has deleted the same with following findings; “7.2 The submission made by the appellant is considered. During the year under consideration the appellant engaged in the business of generation of electricity through solar energy and for the same the appellant has maintained two power generation facilities situated at Kolayat District Power Purchase Agreement (PPA). Power Purchase Agreement entered by the appellant with P a g e | KC India Ltd. (AY: 2018-19) Jodhpur VidyutVitran Nigam Limited dated 25.09.2013 and 12.03.2013 for 2 MW and 3 MW power projects respectively. The clause 4 of the agreement "4.AND whereas the power producer desires to set up such new solar energy based plant of 2MW Capacity at Village SharahKisnayat, Tehsil Kolayat, Bikaner District to produce the electricity energy and do not have any preferential tariff PPA and exercised the option Under REC mechanism under aforesaid CERC & RER regulations and procedures, for sale of entire (100%) electric energy so produced for commercial purposes from such power plant to Jodhpur Discom. This can be modified with the permission of concerned Discom(s)" "i) The power purchase price payable by the Discom shall be equal to the Pooled cost of Power Purchase as per Attached Annexure B. ii) ...... iii) ...... iv) Not withstanding anything contained in this agreement, the parties agree that the Renewable Energy Certificates (REC) available to the power produce from the project shall be sole property of the power producer and that the Discom will not have any claims) thereto and or seek any adjustment or set-off in power purchase cost payable by the Discom to the Producer under this agreement. v) In case REC mechanism is repealed / expires RE generator can switch over top referential tariff mechanism subject to scope to accommodate the same in the RPO target of the licensee at a tariff to be determined by the commission and / or sell renewable energy at mutual agreed price to other obligated entities. " Thus the appellant opted for REC(Renewable Energy Certificates) mechanism under CERC(Central Electricity Regulatory Commission)&RERC (Rajasthan Electricity P a g e | KC India Ltd. (AY: 2018-19) Regulatory Commission) regulations and it has not opted for preferential tariff PPA. Sub clause 'V" of above clause there is a clear mention that in case REC mechanism is repealed / expires than the Renewable Energy Manufacturer can switch over to preferential tariff mechanism. 7.3 The Hon'ble Supreme Court in the case of Meghalaya Steels Ltd. (2016) 67taxmann.com 158 (SC)/[2016] 238 Taxman 559 (SC)/[20161 383 ITR 217 (SC)/[2016] 284 CTR 321 (SC)[09-03- 2016] held that Section 80-IB, read with section 80-IC, of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings (Computation of deduction) - Assessment year 2004-05 - Assessee claimed deduction for (a) transport subsidy: (b) interest subsidy; (c) power subsidy; and (d) insurance subsidy, treating them as profits derived from business - Revenue contended that subsidies so received had no close and direct nexus with assessee's business and thus could not be treated as profits derived from business - Whether subsidies were reimbursed to assessee for elements of cost relating to manufacture or sale of their products and, thus, there was certainly a direct nexus between profits of assessee's business and reimbursement of such subsidies - Held, yes - Whether, therefore, deduction was admissible on such subsidies Held, yes [Para 18] [In favour of assessee). 7.4 Hon'ble Andhra Pradesh High Court in the case of Decean Industrial Products V. Asst. CIT (2015) 375ITR256 wherein it was held that expression derived from any business of an industrial undertaking will have to be read to mean the gross total income of an assessee derived from the business of an industrial undertaking. 7.5 Thus from above it can be inferred that Power Purchase Price Agreement and the conditions laid down in Notification No. L-1/12 /2010-CERC dated 14.01.2010 goes hand in hand and P a g e | KC India Ltd. (AY: 2018-19) thus the consideration received by the appellant for the sale of electricity includes the price ofREC certificates. Therefore from above it is inferred that at sub clause 'V' of the agreement in itself clears the air that there are two parts of consideration one is that is paid by Discom and another is through issuance of REC (Renewable Energy Certificates), and in case the REC mechanism is repealed than the Whole Consideration will shift to preferential tariff mechanism which is altogether a different pricing system. 7.6. In view of the above discussion and judicial pronouncement, the AO is directed to delete the disallowance of Rs. 5,64,43,387/. Accordingly grounds of appeal no. 01 to 03 raised by the appellant are hereby allowed."
6. The contention of ld. DR, as relied from the report of ld. AO are as follows; “The decision of the Ld. CIT(A) is not acceptable on deletion of the addition of Rs. 5,64,43,387/- on account of disallowance of deduction u/s 80IA in view of the following facts: (i) The Ld. CIT(A) ignored the fact that provisions of section 80IA clearly states that only income derived by an undertaking or an enterprise from any business referred to in sub-section (4) of section 80IA is eligible for deduction8OIA. The relevant portion of the section 80IA(1) is reproduced as under: "(1) Where the gross total income of an assessee includes any profits and gains "derived by" an undertaking or an enterprise from any business referred to in sub-section (4), there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of an amount to hundred percent of the profits and gains derived from such business for ten consecutive assessment years."
P a g e | KC India Ltd. (AY: 2018-19) Hence, subsection 80LA makes it clear that the deduction is allowable in respect of profits and gains "derived from" manufacture or produce of article or things. It is settled law that the use of the term "derived from requires a direct and proximate connection between eligible activity and income from the same. (ii) In the present case, the assessee claimed deduction in respect of sale of renewable energy certificate which it has received from Renewable Energy Certificate of India. In this case, the assessee has not sold anything to Renewable Energy certificate of India. Further, the assessee has also made it clear this certificate is apart from the consideration received from the parties to whom it had made the sale. (iii) Reliance is placed on the decision of the Hon'ble Supreme Court on the similar issue in the case of Pandian Chemicals Ltd. Vs CIT 262 ITR 278 and in the case of Camby Electric Supply Industrial Company Ltd. Vs CIT 113 ITR 84 explicitly held that once expression "derived from" is used by the legislature then only profit from a particular business undertaking are eligible for the deduction and not all kinds of profits are eligible profits. (iv) Further, the REC certificates are issued to power producer if it fulfils certain conditions within REC framework as it is a settled principle that to received Government Incentive, everyone have to fulfill some basic conditions which is required as per notification/law. Thus fulfilling conditions laid down by the govt./Central Agency cannot be termed as REC framework. Thus the income received is also not income derived from eligible undertaking. (v) Assessee has himself consider income from sale of REC certificate as other income which clearly indicate that it is not eligible for deduction u/s 80IA of the Act. (vi) The sale of electricity to Jodhpur VidyutVitran Nigam Limited is directly arelated to business of power generation (i.e. first degree of income) and therefore the consideration received for the same is related to the business of power generation P a g e | KC India Ltd. (AY: 2018-19) whereas the sale of REC is made subsequent to the sale of electricity is second degree of income. (vii) Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Liberty India vs CIT wherein it has been held that only the first-degree income is eligible for deduction under chapter VI-A and the second degree of income generated cannot be held to be derived from the eligible business. (viii) Sale of REC, which is usually purchased by entities trying to reduce their Carbon footprint, is different from sale of electricity and hence cannot be held to be directly derived from the business of power generation which is eligible for deduction u/s 80IA of the Act.Thus the commercial activity of sale of REC in the exchange can be said to be an independent and separate line of business of the assessee. (x) Such action of the assessee indicates that the assessee knowingly and willingly opted for REC instead of direct sale of electricity for a consideration. Therefore, such act on the part of the assessee is not process related to manufacturing of electricity or direct sale of electricity but trading of the REC like a tradable commodity. In view of the above, the decision of the Ld. CIT(A) is not acceptable on this ground.”
We find no substance in the contention of department as these certificates are integral part of the consideration received on sale of electricity, which is eligible business. The same are not in the form of any incentive. Assessing officer had failed to understand the model of operation and how the revenue generation was indirectly through the certificates P a g e | KC India Ltd. (AY: 2018-19) also.Learned AR has established before us that except for the year under consideration in the preceding and subsequent years income from the sale of certificates was not made basis for disallowance of the deduction. Thus on rule of consistency also the claim, was liable to be allowed. We find no substance in the contentions raised and the grounds deserve to be rejected. Accordingly ordered.
Ground no. 4 and 5 concern the disallowance of Rs. 25,37,807/- of deduction u/s 801A on account of interest income. Same was allowed by the ld. CIT(A) and the relevant findings are as follows; “1. During the year appellant has received interest of Rs. 25,37,807/- on the deposits maintained with Punjab National Bank. The reason for such deposit was to maintain margin money with the bank against loan taken from bank for purchase of Plant & Machinery.
The assessee hereby humbly submits the foundation of generation of electricity through renewable sources is not possible without installing specific/specialized plant & machinery. And in order to establish such plant the appellant took loan from Punjab National Bank.
As a matter of fact the appellant has also debited interest on loan paid to the bank in the Profit & Loss Account amounting to Rs. 51.29,526/-, the very fact can be verified from the stand alone Profit & Loss account maintained for the eligible units placed at page no. to of the paper book.
P a g e | KC India Ltd. (AY: 2018-19) 4. Thus the interest income which has been earned is from the fixed deposits kept as security/margin money for the said loans, since the interest expense has been allowed as deduction therefore the set off of the interest income against the same must be allowed.
The appellant also relies on the judgement by the Hon'ble High Court of ORISSA in the case of Odisha Power Generation Corporation Ltd. V.Assistant Commissioner of The Income Tax (2022) 138 taxmann.com 341 (Orissa) (11-03-22) wherein assessee had earned interest on advances given to its employees and on bonds issued by GRIDCO as payment consideration, the Hon'ble High Court was of the view that the interest income earnedonsuch advances and bonds had a direct nexus with essential business activity of assessee and thus same is allowed. Thus in view of aforementioned stated facts and legal precedents the disallowance of deduction u/s. 80IA(4) of the Act is bad in law. 9.2 I have considered the submission of the appellant. During the assessment proceedings AO observed that the assessee has earned interest income on the fixed deposits and that have has no director proximate relation with the eligible activity. In other words the said interest earned on fixed deposits carnot be treated as being "derived from" profits of business of industrial undertaking. Income can be said to be derived from an activity if the said activity is immediate and effective source of said income. Income cannot be said to be derived from an activity merely by reason of the fact the activity was performed to earn the said income in an indirect, incidental or remotemanner. Therefore, deduction u/s 801A cannot be allowed on the interest earned on fixed deposits. Further, appellant has stated that Thus the interest income which has been earned is from the fixed deposits kept as security/margin money for the said loans, since the interest expense has been allowed as deduction therefore the set off of the interest income against the same must be allowed.
P a g e | KC India Ltd. (AY: 2018-19) 9.3 In the regard, reliance is placed of the Hon'ble High Court of Orissa in case of Odisha Power Generation Corporation Ltd. [2022] 138 taxmann.com 34l (Orissa)[11-03-2022] held that Section 80-1A of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertaking (Power generation) - Assessment years 2002-03, 2003-04, 2007 08, 2008-09 and 2009- 10 - Assessee was a Government of Odisha enterprise solely engaged in business of generation of power - Assessee had set up power plants including Thermal Power Stations and Mini Hydel Projects in Odisha - Power generated by assessee's plants was sold exclusively to Grid Corporation of Odisha Limited (GRIDCO) under a Power Purchase Agreement (PPA) - In each of assessment years in question, initially a return of income was filed disclosing total income at NIL and thereafter, a revised return was filed disclosing income after claiming deduction under section 80-IA on interest received - Claim of assessee under section 80-IA was rejected on ground that assessee had not been able to show any nexus between impugned interest received by it with interest payable - However, it was found that there was no other activity of assessee except power generation Assessee offered an explanation regarding interest income earned by it, from advances given to its employees and further, late payment for electricity supplied, was sought to be made up by GRIDCO by issuing bonds on which assessee earned interest - Thus, this had a direct nexus with essential business activity of assessee - Whether therefore, revenue was in error in disallowing deduction under section 80IA - Held, yes [Paras 11, 12 and 15] [In favour of assessee] 9.4 In view of the above, judicial pronouncement and facts and circumstances of the case the disallowance of Rs. 25,37,807/- made by the appellant is hereby deleted. Accordingly ground of appeal no. 05 raised by the appellant is hereby allowed.”
9. Ld. DR has relied the submissions of ld. AO, and same are reproduced below; P a g e | KC India Ltd. (AY: 2018-19) “Further, the Ld. CIT(A) also deleted disallowance of Rs. 25,37,807-on account of deduction claimed u/s 80IA on interest income. Ld. CIT(A) erred in ignoring the fact that as per provisions of section 80IA, it is clear that only profits and gains from business are eligible for deduction u/s 80IA of the Act and therefore, the interest received from bank cannot be held to be profits and gains of business and hence not eligible for deduction u/s 80IA. The interest income earned on Fixed deposits has to be treated as "income from other sources". In this case, the assessee earned interest income on the fixed deposits and that has no direct or proximate relation with the eligible activity. Income from fixed deposits cannot be treated as being "derived from" profits of business and industrial undertaking. Income can be said to be derived from an activity if the said activity is immediate and effective source of said income. Income cannot be said to be derived from an activity merely by reason of thefact the activity was performed to earn the said income in an indirect, incidental or remote matter. Reliance is placed on decision in the case of M/s Conventional fasteners vs CIT 2018-2002-SC-IT judgement in which it is made clear that the interest has to be taxed under the head income from business and profession" but deduction u/s 80IC is not allowable as the same is not derived from the business and profession. Further, the Hon'ble ITAT, Delhi in the case of DCIT vs. SMS ParyavaranPvt. Ltd. Wherein the Hon'ble ITAT relying on the judgments of Hon'ble Apex court in the case of M/s. Conventional Fasteners vs. CIT2018-TOIL-2002-SC-IT judgment dated 16th May 2018 held that interest earned on FDR maintained with the bank for obtaining bank guarantee for performance of any business activity even if related to any govt. infrastructure project cannot override the basis structure of section 80IA which intends to provide deduction only in respect of activities directly related to the process of providing infrastructure facilities. Income cannot be said to be derived from an activity merely by reason of P a g e | KC India Ltd. (AY: 2018-19) the fact that activity was performed to earn the said income in an indirect, incidental or remote manner. In view of the above, the decision of the Ld. CIT(A) on the above mentioned grounds is not acceptable. Moreover, the tax effect is above the monetary limit prescribed in CBDT Circular no. 05/2024 dated 15.03.2024 and the case does not fall under any exception laid down in CBDT Circular 09/2024 dated 17.09.2024. Therefore, further appeal is recommended in this case.
10. There is no dispute to the fact that has only income from sale of electricity. The income from interest earned is on account of fixed deposits made in the bank to procure a loan which has been ultimately used for generating the revenue from sale of electricity. Interest paid on account of the loan stands allowed. Therefore, the contention of the assessing officer that the interest is not derived from the eligible business is too far stretched and the interest is certainly outcome of the main activity as same would not have been accomplished without the plant and machinery purchased from the loan raised. Learned AR has also established before us that except for the year under consideration in the preceding and subsequent years income from the such interest was not made basis for disallowance of the deduction. Thus on rule of consistency also the claim, was liable to be allowed. We find no P a g e | KC India Ltd. (AY: 2018-19) substance in the contentions raised and the grounds deserve to be rejected. Accordingly ordered.
11. In light of a aforesaid discussion as the grounds raised by the department have no substance. The same are rejected and the appeal of the department is dismissed.
Order pronounced in the open court on 08.04.2026