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Facts
The assessee claimed a deduction under Section 80IA for solar power income but the Assessing Officer found a discrepancy, attributing Rs. 12,27,384/- to Renewable Energy Certificates (RECs) which were deemed taxable. The AO/CIT(A) also disallowed Rs. 3.80 lakhs of partner's remuneration, attributing it to the solar unit, and Rs. 3,25,692/- in depreciation on solar assets, which the CIT(A) did not adjudicate.
Held
The Tribunal held that income from the sale of RECs is a capital receipt and not taxable business income, allowing Ground No. 2, especially since Section 115BBG (taxing carbon credits) was prospective from 01.04.2018. However, the disallowance of partner's remuneration was upheld (Grounds No. 3 and 4 dismissed), affirming that some remuneration is attributable to the income-generating solar unit. The depreciation issue (Ground No. 5) was remanded back to the CIT(A) for adjudication as it was previously overlooked.
Key Issues
1. Whether income from the sale of Renewable Energy Certificates (RECs) is a capital receipt or revenue income, and thus taxable or eligible for deduction under Section 80IA. 2. Whether the disallowance of partner's remuneration, partially allocated to the solar power unit claiming Section 80IA deduction, was justified. 3. Whether the disallowance of depreciation on solar building and machinery was proper.
Sections Cited
80IA, 143(1), 40(b), 40A(2), 234B, 234C, 270A, 115BBG, 178(1) (Electricity Act, 2003), 66 (Electricity Act, 2003), 178(2) (Electricity Act, 2003), 2(24), 28, 45, 56
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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2017-18) Mayur Dyechem Intermediates Vs. Deputy Commissioner of LLP, Income Tax, A-1/108, Phase-II, Circle-3(2), GIDC Vatva Vatva, Ahmedabad Ahmedabad-382445 [PAN No.AAZFM4023E] (Appellant) .. (Respondent) Appellant by : Shri Tushar Hemani, Sr. Adv. & Shri Parimalsinh B. Parmar, ARs Respondent by: Shri Kalpesh Rupavatia, Sr. DR Date of Hearing 30.04.2025 Date of Pronouncement 18.06.2025 O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 09.03.2023 passed for A.Y. 2017-18.
2. The assessee has raised the following grounds of appeal:
“1. The Ld. CIT(A) has erred in law and on facts in confirming the disallowance of deduction ofRs.l2,27,384/- claimed u/s. 80IA of the Act. The sale of REC is income derived from eligible business u/s. 80IA and the profit on the same ought to have been allowed as deduction u/s. 80IA.
Alternatively, and without prejudice the receipts received by the Appellant on sale of REC (carbon credits) are capital in nature and hence, the same are not taxable. Section 115BBG of the Act dealing with taxation on transfer of carbon credits is inserted in the statute book w.e.f. 01.04.2018 and it is prospective in nature, hence not applicable in the case of the appellant.
Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 2– 3. The Ld. CIT(A) erred in law and on facts in confirming disallowance of partner's remuneration of Rs. 3,80,000/- which is in compliance with Section 40(b) and Section 40A(2) of the Act.
4. The Ld. CIT(A) erred in law and on facts attributing partner's remuneration of Rs.3,80,000/- to the solar power unit. Remuneration taken by the partners is based on mutual agreement and it is not mandatory to take remuneration from each business unit.
5. The Ld. CIT(A) erred in law and on facts in not adjudicating the ground relating to disallowance of depreciation of Rs.3,25,692/- on solar building and machinery.
6. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s.234B/C of the Act.
7. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in initiating penalty u/s.270A of the Act.
The Appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
Ground Nos. 1 & 2: 3. The brief facts of the case are that the assessee filed an e-return of income for the assessment year 2017-18 on 02-09-2017, declaring a total income of Rs. 26,75,45,830/-. The return was processed under Section 143(1) of the Income-tax Act, 1961 (“Act”). During the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed a deduction under Section 80IA of the Act for solar power plants amounting to Rs. 3,60,646/-, as shown in Form 10CCB. The Assessing Officer asked for detailed workings and proof of this income. In response, the assessee uploaded bills of electricity sales to the Rajasthan Power Corporation. However, upon review, the Assessing Officer observed that the actual income from the sale of power was only Rs. 26,09,782/-, as reflected in the Profit and Loss (P&L) account. The assessee failed to provide evidence or an explanation for the balance amount of Rs. 12,27,384/-, which was Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 3– shown as income from the sale of Renewable Energy Credits (RECs). The Assessing Officer was of the view that the assessee could not clarify what REC is or how it qualifies for a deduction under Section 80IA of the Act. The Assessing Officer was of the view that the REC were related to the sale of Carbon Credits, which is a taxable receipt and not income from power generation. Since income from the sale of carbon credits is not related to an eligible business under Section 80IA, the claim for a deduction of Rs. 12,27,384/- was denied and added to the total income.
In appeal, Ld. CIT(Appeals) confirmed the additions made by the Assessing Officer. Notably, it was not argued before Ld. CIT(Appeals) that sale of REC qualities as capital receipt and hence not liable to tax in the first instance.
The assessee is now before us in appeal against the decision of Ld. CIT(Appeals). Before us, the Counsel for the assessee submitted that the sale of RECs is not taxable as income but is instead a capital receipt. The assessee placed reliance on several judicial precedents in support of this contention. It was submitted before us that the RECs are issued by Regulatory Authority to incentivize power producers who generate energy from renewable sources. These certificates are tradable on power exchanges approved by the regulatory authority. The sale of RECs is essentially an entitlement received for contributing to environmental conservation and the reduction of harmful emissions. Therefore, the income generated from the sale of RECs is not taxable under the Act. In support of this argument, the Counsel for the assessee placed reliance on several judicial decisions, including PCIT v. Gujarat Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 4– Fluorochemicals Ltd. [2023] 155 taxmann.com (Gujarat), CIT v. My Home Power Ltd. [2014] 365 ITR 82 (Andhra Pradesh), CIT v. Subhash Kabini Power Corporation Ltd. [2016] 385 ITR 592 (Karnataka), and Essel Mining & Industries Ltd. v. DCIT [2022] SCC Online ITAT 311. The assessee submitted that Section 115BBG, which specifically taxes carbon credits as capital receipts, was introduced into the Statute only prospectively, w.e.f. 01.04.2018, and is thus not relevant for the impugned assessment year. Alternatively, and without prejudice to the primary argument, the assessee submitted that if the sale of RECs is considered a revenue receipt, it should still be eligible for the deduction under Section 80IA as income generated from the business of power generation. The assessee placed reliance on the Supreme Court ruling in the case of CIT v. Meghalaya Steels Ltd. [2016] 383 ITR 217, in which it was held that that income from activities directly related to business operations should be treated as qualifying income for the purposes of claiming deductions under Section 80IA of the Act. The REC Scheme Document was also placed before us for our reference.
In response, the Ld. DR placed reliance on the observations made by the Assessing Officer and Ld. CIT(Appeals) in their respective orders.
We have heard the rival contentions and perused the material on record. We observe that similar issue came before the ITAT in the case of Satia Industries Ltd. vs. National Faceless Assessment Centre, New Delhi [2023] 151 taxmann.com 358 (Amritsar - Trib.)/[2023] 106 ITR(T) 550 (Amritsar - Trib.)/[2023] 202 ITD 189 (Amritsar - Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 5– Trib.)[13-06-2023], in which the Tribunal held that income earned from sale of RECs/ESCs (carbon credits) is a “capital receipt” and not business income since carbon credit is an offshoot from environmental concern and not an offshoot from business, thus, it will not be taxable. The brief facts of this case are that the assessee-company was a manufacturer of writing and printing paper, having factory premises at village Rupana situated at Muktsar Sahib. The assessee-company had a co-generation captive power division also, in which electricity was generated from renewable source i.e. bio-fuel, re-include rice husk, unlike other companies which utilised fossil fuel i.e. coal and diesel and the same was consumed by the paper division. The generation of power from renewable energy resources helped in reduction of emission of carbon/heat and gases in environment. During the impugned financial year, the Ministry of New and Renewable Energy (MNRE) issued transferable and saleable credit certificates under the Electricity Act, 2003, (which are generally referred to as Renewable Energy Certificates ("RECs")). Such RECs are issued, under the Central Electricity Regulatory Commission Regulations, 2010 ("CERC") issued in pursuance to section 178(1) and section 66 r.w. Clause (y) of section 178(2) of the Electricity Act, 2003. During the impugned year, the assessee earned from sale/transfer of REC/ESCs, a sum of Rs. 17,77,26000/-. During the assessment proceedings, the assessee amended its claim related to income earned from the sale/transfer of RECs/ESCs as “capital receipt” and recomputed the tax by claiming exemption of tax on said income. The Tribunal while allowing the appeal of the assessee on this issue made the following observations:
“15. We heard the rival submission and considered the documents available in the record. First, we consider the issue whether assessee is eligible for the income from RECs and ESCs capital in nature and shall be considered as capital receipt or revenue receipt. First to ascertain the issue related technical nitty gritty of the REC &ESC's. 15.1 CARBON CREDITS v. RENEWABLE ENERGY SOURCES v. ESCERTS That in the present era global warming and environmental concerns are on the mind of everybody and all the developed/underdeveloped countries are having their meetings regularly to devise new modes to reduce the emission of greenhouse gases i.e. Carbon dioxide/Methane etc. to impede global warming because the emission of excessive greenhouse gases primary polluter of environment. 15.2 Common Feature [Credit for reducing carbon emission or greenhouse effect] The common features of Carbon Credits/RECs/ESCERTS is that these are the incentives given to reduce the Carbon footprints i.e. emission of Greenhouse gasses such as carbon dioxide/methane etc. and the basics of all three of them and the difference are as under: - (a) Basics of Carbon Credits As stated above, the emission of greenhouse gases/Carbon which primarily comprises of Carbon dioxide, Methane, Nitrous Oxide and Fluorinated gases, are a primary polluter of the environment. (i) The carbon credits are of two types. The first type of carbon credits is validated by united nation Framework on Climate Change under Kyoto Protocol and are taxable u/s 115BBG of the Act at special rate. (ii) That under the Kyoto Protocol to the United Nations framework convention on climate change, it was mutually agreed by the participant counties to reduce emission of Green House Gases/Carbon foot print the credit is given to the 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 i.e. 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 ESCERTs for 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 sections 2(24),28,45 & 56 of the Income-tax Act, 1961. [The taxability of Carbon Credits stands changed w.e.f. AY 2018-19] (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. l7,77,26,000/-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.”
Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 8– 8. In view of the aforesaid decision of Tribunal, which on a similar set of facts allowed the issue in favour of the assessee, and considering the position that Section 115BBG, which specifically taxes sale of carbon credits, was introduced in the Act w.e.f. 01.04.2018, we are of the considered view that the income from sale of REC is not taxable since the same qualifies as “capital receipt” for the impugned year under consideration.
In the result, Ground Number 2 of the assessee’s appeal is allowed.
Since, we have held that the income of sale of REC qualifies as “Capital Receipt” and hence not taxable, we are not adjudicating Ground No. 1 raised by the assessee.
Ground Number 3 and 4: disallowance of partner’s remuneration: 11. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the assessee had not claimed any expenditure against income earned from sale of power, on which deduction under Section 80-IA of the Act was claimed by the assessee. On being asked, the assessee submitted that all the running and maintenance costs were being incurred by the vendor from whom the solar plant was purchased, as per agreement. Accordingly, no costs were allocated towards running and maintenance of the solar power plant. However, the Assessing Officer was of the view, that looking into the assessee’s set of facts, it is evident that partners of the assessee firm would have clearly devoted their time and energy towards income earning activities on which exemption was Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 9– claimed by the assessee. Further, remuneration to the partners are payable in respect of business as a whole and it cannot be said that such remuneration is not payable with respect to “exempt income”. The Assessing Officer noted that nothing has been allocated towards exempt income purposefully by the assessee with a view to increase the exempt income and decrease the taxable income earned by the assessee, since partner’s remuneration had been allocated wholly towards taxable income, with a view to reduce the same. Accordingly, the Assessing Officer held that since it is not possible for the unit, on which exemption was claimed, to generate income on it’s own without any involvement of the partner’s, proportionate remuneration given to partners was disallowed by the Assessing Officer. The Assessing Officer noted that the ratio of the total turnover versus the power income is 0.1% and accordingly, the Assessing Officer held that this proportion is liable to be treated as remuneration related to power unit and the same was disallowed accordingly. Hence, an addition of Rs. 3.80 lakhs was made to the total income of the assessee.
12. In appeal, Ld. CIT(A) upheld the order of the Assessing Officer.
13. Before us, the Counsel for the assessee submitted that the business is operating automatically without requiring significant time or efforts of the partners and hence no separate allocation has been made. This is substantiated by several key points: a power purchase agreement was entered into with the Discom (Distribution Company) under which all the power generated by the assessee would be purchased by the Discom negating the need for any sales or marketing functions. Further, an agreement was made with the developer of the Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 10– solar power park to manage the operation and maintenance of the plant without incurring any additional cost to the assessee. Payments for the power generated are made regularly by the Discom via ECS (Electronic Clearing Service) based on the power produced, making the collection process automated. Consequently, the business does not require any manpower or infrastructure to function. The Counsel for the assessee argued that as there are no significant efforts or costs incurred for running the power generation business, and therefore it is not necessary to allocate any expenses, such as the remuneration paid to partners, to this business. The Counsel for the assessee further argued that, as established in prior rulings, unless an expenditure is directly related to an eligible unit for claiming a deduction under Section 80IA, it cannot be apportioned to that unit. To support this argument, the assessee has cited precedents such as DCIT v. Hira Ferro Alloys Ltd. [2018] 90 taxmann.com 430 (Raipur-Trib.) and ACIT v. P.I. Industries [2012] 23 taxmann.com 301 (Jodhpur-Trib.), where similar principles were upheld.
14. On going through the facts of the case, we observe that the assessee did not claim any expenses against the receipts from the sale of power, while claiming deductions on the entire income from these receipts. We are unable to accept the argument of the assessee that there was no requirement for the partners to dedicate any time and effort to the income-generating activities of the business on which exemption was being claimed. Additionally, we are of the view that the Assessing Officer / Ld. CIT(Appeals) have correctly observed that remuneration to the partners is payable as working partners in relation to the business as a whole and it cannot be accepted that such Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 11– remuneration is not payable with respect to exempt income. The Assessing Officer observed that no portion of the remuneration had been allocated toward the exempt income, which seemed intentional to inflate the exempt income and reduce the taxable income. In our view the Assessing Officer is correct in taking the view that it is unreasonable to assume that the unit would generate income entirely on it’s own without any involvement of the partners. In our view, the Assessing Officer has correctly held that given that the ratio of the total turnover to power income was 0.10%, this proportion was correctly treated as remuneration related to the power unit and was disallowed, thereby resulting in a disallowance of Rs 3,80,000 to the total income of the assessee.
15. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) so as to call for any interference. Ground Number 3 and 4 of the assessee’s appeal are hereby dismissed.
Ground No. 5:- Disallowance of depreciation of Rs. 3,25,692/- on solar building and machinery.
The brief facts in relation to the ground of appeal are that the Assessing Officer observed that the depreciation chart submitted by the assessee revealed depreciation claims on the solar plant and the solar building. The depreciation on the solar plant amounted to Rs. 34,092/- and depreciation on the solar building to Rs. 2,91,600/-. These items were claimed along with depreciation on other assets against the income of another unit of the assessee. The Assessing Officer was of the view that the income from solar power generation should have been allocated Mayur Dyechem Intermediates LLP vs. DCIT Asst.Year –2017-18 - 12– appropriately to the solar power business. As a result, an addition of Rs. 3,25,692/- was made to the total income of the assessee.
17. In appeal, Ld. CIT(A) did not adjudicate on this issue. We observe that since Ld. CIT(A) has not given any finding with respect to this addition made by the Assessing Officer, despite the assessee taking a specific ground in the appeal filed before him, the matter is hereby restored to the file of the Ld. CIT(A), to adjudicate on this matter.
18. In the result, Ground No. 5 of the assessee’s appeal is allowed for statistical purposes.
Since only the above Grounds of Appeal were argued before us, all other Grounds of Appeal are hereby dismissed as Not Pressed.
In the combined result, appeal of the assessee is partly allowed. This Order pronounced in Open Court on 18/06/2024
Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 18/06/2024 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,