Income From The Sale Of RECs Is Capital In Nature, Is Not Subject To Taxation: ITAT

The Amritsar Bench of the Income Tax Appellate Tribunal (ITAT) has held that the income from the sale of Renewable Energy Certificates (RECs) is classified as capital in nature and is not subject to taxation.

The bench of Anikesh Banerjee (Judicial Member) and M. L. Meena (Accountant Member) observed that all the modes of incentives were in the nature of entitlements received to improve the world's atmosphere by reducing carbon and heat, the emissions and entitlements earned can, at best, be recorded as ‘capital receipts and cannot be taxed as revenue receipts.

The petitioner/assessee company is a manufacturer of writing and printing paper, having factory premises in the village of Rupana, situated at Muktsar Sahib. The assessee company also has a cogeneration captive power division in which electricity is generated from renewable sources, namely bio-fuel, which includes rice husk, unlike other companies that use fossil fuels, i.e., coal and diesel, and it is consumed by the paper division. The generation of power from renewable energy resources helps reduce emissions of carbon, heat, and gases into the environment.

The department noted that it is not related to a carbon credit, so it is not covered under Section 115 BBG or as exempted income. The department had properly taken it as an income from the business.

The assessee contended that the assessee should get benefit-related RECs and ESCs as capital receipts and not be part of 115BBG.

The common feature of Carbon credits, RECs, and ESCERTs is that these are incentives given to reduce carbon footprints, i.e., emissions of Greenhouse gases such as carbon dioxide, methane, etc.

The Tribunal noted that the credits in all three modes of reduction of ‘carbon footprint’ are not generated or created due to carrying on business, but accrued due to concern of the word to improve the emission of greenhouse gases, which are primary polluters of the environment. Thus, the amount received for carbon Credits’ has no element of profit or gain, is not subjected to tax under any head of income, and is not liable for tax in terms of sections 2(24), 28, 45, and 56 of the Income Tax Act, 1961.

The ITAT held that the income is an offshoot of environmental concern, not an offshoot of business concern. Nature is fully related to environmental health. The income is capital in nature and not liable to tax under business income.

Case Title: M/s Satia Industries Ltd. Versus NFAC

Case No.: I.T.A. No.193/Asr/2022

Date: 13.06.2023

Counsel For Appellant: Sudhir Sehgal, P. N. Arora, Ashwani Juneja

Counsel For Respondent: Girish Bali

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