Taxability of income from sale of carbon credits has been a litigious issue since such income is generally treated as a capital receipt not liable to tax by the assessee, while the Income tax Department takes a stand that the same is in the nature of business income and thus, should be taxed under the IT Act.  While the issue is pending before the SC in the case of PCIT v. Lanco Tanjore Power Co. Ltd.^[1], the view of various High Courts in the undernoted cases^[2] is in favour of the taxpayers and income from sale of carbon credits has been consistently treated as capital receipt not liable to tax.

Interestingly, an amendment was brought into the IT Act by way of the Finance Act, 2017 with effect from April 1, 2018 whereby a new provision was brought into the statute being Section 115BBG of the IT Act, which provides a flat tax rate of 10% (ten percent) on gross income earned by a taxpayer from sale of carbon credit.  In terms of this Section, carbon credit has been defined as the reduction of greenhouse gases which is validated by the United Nations Framework on Climate Change (‘UNFCC’).

Recently, a bench of Income Tax Appellate Tribunal at Amritsar (‘Amritsar ITAT’) in the case of Satia Industries Ltd. v. NFAC^[3], allowed the exemption claimed by an assessee with respect to its income from transfer of Renewable Energy Certificates^[4] (‘RECs’) by treating the same as capital receipt for Assessment Year 2018-19.  In its return of income, the assessee had offered the income arising from transfer of RECs to tax under Section 115BBG of the IT Act. However, such claim was rejected as the assessing officer was of the view that the same is in the nature of business income. During assessment proceedings, the assessee also modified its claim and claimed tax exemption on the ground that the same was in the nature of capital receipt and thus, not liable to tax.

While relying on the decision of the SC in the case of Goetze (India) Ltd. v. CIT^[5], the Amritsar ITAT admitted the additional claim raised by the assessee and adjudicated on the question of whether RECs were covered under the definition of ‘carbon credit’ as defined under Section 115BBG of the IT Act so as to attract tax at the rate of 10% (ten percent).

The ITAT at the threshold took note of the fact that carbon credits can either refer to carbon credits validated by the UNFCC under Kyoto Protocol or the same can be in the nature of voluntary carbon credits which are regulated by independent body like Verra.  In terms of the decision of the Amritsar ITAT, only the former is covered within the provision of Section 115BBG of the IT Act.

While analysing the nature of RECs, the Amritsar ITAT observed that the same is in the nature of an incentive for production of electricity from Renewable Energy sources like rice husk and wheat straw (in the present case) and is a mechanism to reduce carbon footprint by reducing reliance on fossil fuels like diesel, coal etc.  Thus, as per the Amritsar ITAT, such certificates were in the nature of entitlement received to improve world atmosphere by reducing carbon / heat and gases emissions, and, thus, such entitlement earned can, at best, be recorded as ‘capital receipt’ and cannot be taxed as ‘revenue receipt’.  The Amritsar ITAT on the basis of such analysis returned a finding that the consideration received on transfer of RECs by the assessee fell under the second bucket and thus were not covered under Section 115BBG of the IT Act as the same were not regulated in terms of UNFCC.

[1] PCIT v. Lanco Tanjore Power Co. Ltd., [2021] 133 taxmann.com 93 (SC).

[2] PCIT v. L.H. Sugar Factory (P.) Ltd., [2017] 88 taxmann.com 647 (Allahabad); CIT v. Ambika Cotton Mills Ltd., [2021] 125 taxmann.com 206 (Madras); CIT v. My Home Power Ltd., [2014] 46 taxmann.com 314 (Andhra Pradesh); CIT v. Subhash Kabini Power Corporation Ltd., [2016] 69 taxmann.com 394 (Karnataka).

[3] Satia Industries Ltd. v. NFAC, [2023] 151 taxmann.com 358 (Amritsar – Trib.).

[4]  RECs are transferable and saleable credit certificates issued by the Ministry of New and Renewale Energy under the Central Electricity Regulatory Commission Regulations, 2010.

[5] Goetze (India) Ltd. v. CIT, [2006] 157 Taxman 1 (SC).