Section 80IA Deduction | Income from Renewable Energy Certificates Integral to Power Sale, Rules ITAT Delhi

The Income Tax Appellate Tribunal, Delhi, has clarified that income derived from Renewable Energy Certificates (RECs) issued under regulatory frameworks is not a separate or second-degree income, but an integral component of the consideration for electricity sold by eligible industrial undertakings. This ruling affirms the eligibility of such income for deduction under Section 80IA of the Income Tax Act, 1961, and extends similar reasoning to interest income earned on deposits made to secure loans for infrastructure development.

Background & Facts

The Dispute

The dispute centered on whether income generated from the sale of Renewable Energy Certificates (RECs) and interest earned on fixed deposits constituted eligible profits under Section 80IA of the Income Tax Act, 1961. The assessee, KC India Ltd., is engaged in the business of generating electricity through solar energy projects in Rajasthan. It opted for the REC mechanism under the Central Electricity Regulatory Commission (CERC) and Rajasthan Electricity Regulatory Commission (RERC) regulations instead of a preferential tariff Power Purchase Agreement (PPA).

Key Facts

• The assessee operates two solar power plants: 2 MW (commissioned under PPA dated 25.09.2013) and 3 MW (commissioned under PPA dated 12.03.2013), both with Jodhpur Vidyut Vitran Nigam Limited.
• Under the PPAs, the assessee agreed to sell 100% of the electricity generated and retained exclusive ownership of all RECs issued in respect of such generation.
• Clause V of the PPA explicitly provided that if the REC mechanism were repealed or expired, the entire consideration would shift to the preferential tariff mechanism.
• For A.Y. 2018-19, the assessee filed a return declaring nil income on 30.09.2018 and a revised return on 08.03.2019, also declaring nil income.
• The return was processed under Section 143(1), determining total income at Rs. 3,80,460.
• The case was selected for complete scrutiny under the CASS system.
• The Assessing Officer (AO) completed the assessment under Section 143(3) read with Section 144B on 12.08.2021, adding Rs. 6,32,43,820 as income, comprising:
  • Disallowance of Rs. 5,64,43,387 under Section 80IA for REC income
  • Disallowance of Rs. 38,82,173 under Section 80IA for insurance claim
  • Disallowance of Rs. 25,37,807 under Section 80IA for interest income
• The assessee appealed before the National Faceless Appeal Centre (NFAC), which, by order dated 15.10.2024, partially allowed the appeal:
  • Deleted the disallowance of Rs. 5,64,43,387 (REC income)
  • Upheld the disallowance of Rs. 38,82,173 (insurance claim)
  • Deleted the disallowance of Rs. 25,37,807 (interest income)
• The Department filed this appeal challenging the deletion of both the REC and interest income disallowances.
• The assessee maintained fixed deposits with Punjab National Bank totaling Rs. 25,37,807 as margin money against bank loans taken for purchase of solar plant and machinery.
• Interest paid on these loans (Rs. 51,29,526) was allowed as a deduction in the Profit & Loss Account.
• In preceding and subsequent years, the income from RECs and interest on deposits was not disallowed, establishing a consistent practice.

Procedural History

• 30.09.2018: Original return filed for A.Y. 2018-19 declaring nil income
• 08.03.2019: Revised return filed declaring nil income
• 12.08.2021: Assessment order passed under Section 143(3) r.w.s. 144B
• 15.10.2024: Order of Ld. National Faceless Appeal Centre (NFAC) allowing partial appeal
• 29.01.2026: Hearing before ITAT Delhi
• 08.04.2026: Judgment pronounced by ITAT Delhi

The Parties' Positions

For the Assessee

• RECs are not a separate income stream but part of the total consideration for electricity sold.
• The PPA explicitly ties REC ownership to electricity generation and provides for conversion to preferential tariff if REC mechanism ceases.
• REC income is inseparable from the eligible business of power generation.
• Interest on deposits is directly linked to financing the plant and machinery essential for electricity generation.
• Interest expense on the loan is allowed; therefore, interest income from margin deposits should be set off as part of the same economic activity.
• Precedent from Odisha High Court and consistency in past years support allowance.

For the Department

• Section 80IA requires income to be "derived from" the eligible business; RECs are a government incentive, not direct revenue from power sale.
• Sale of RECs is a separate commercial activity, akin to trading a commodity, and constitutes second-degree income.
• Interest income from fixed deposits is "income from other sources," not derived from the business of power generation.
• Reliance on Pandian Chemicals, Camby Electric, Liberty India, and Conventional Fasteners to argue that only first-degree income qualifies.
• CBDT Circulars 05/2024 and 09/2024 support appeal due to tax effect exceeding monetary limits.

Relief Sought

The Department seeks to restore the disallowance of:

• Rs. 5,64,43,387 relating to REC income under Section 80IA
• Rs. 25,37,807 relating to interest income under Section 80IA

The assessee seeks confirmation of the NFAC’s order deleting both disallowances.

The Legal Issue

The central questions were: (1) Whether income from Renewable Energy Certificates (RECs) qualifies as profits "derived from" the eligible business of power generation under Section 80IA of the Income Tax Act, 1961; and (2) Whether interest earned on fixed deposits maintained as margin money for loans used to finance eligible infrastructure qualifies as income "derived from" the eligible business.

Arguments Presented

For the Appellant (Department)

The Department contended that Section 80IA permits deduction only for profits "derived from" the eligible business of power generation. It argued that RECs are not a direct product of electricity generation but a government incentive issued under a separate regulatory framework. Citing Pandian Chemicals Ltd. v. CIT (262 ITR 278), Camby Electric Supply Industrial Co. Ltd. v. CIT (113 ITR 84), and Liberty India v. CIT, it asserted that only first-degree income - directly tied to the core activity - qualifies. The sale of RECs, it argued, is a distinct commercial activity akin to trading a commodity, and thus constitutes second-degree income. Regarding interest income, the Department relied on Conventional Fasteners v. CIT (2018 TOIL 2002 SC IT) and DCIT v. SMS Paryavaran Pvt. Ltd., arguing that interest on deposits, even if linked to financing, is not derived from the business activity itself but from financial instruments. It further emphasized that the assessee had classified REC income as "other income," indicating its non-qualifying nature.

For the Respondent (Assessee)

The assessee argued that RECs are not a separate income stream but an inseparable part of the total consideration for electricity under the PPA. Clause V of the PPA explicitly links REC eligibility to the power generation activity and provides for conversion to preferential tariff if the REC mechanism ceases, proving their integral nature. It relied on Meghalaya Steels Ltd. v. CIT (2016) 383 ITR 217 and Decean Industrial Products v. ACIT (2015) 375 ITR 256 to argue that "derived from" includes indirect but integral components of business revenue. Regarding interest income, the assessee contended that the deposits were made solely to secure loans for purchasing plant and machinery essential to its eligible business. Since interest on the loan was allowed as a deduction, the interest earned on the margin deposits should be treated as a correlative income, not as a separate source. It cited Odisha Power Generation Corporation Ltd. v. ACIT (2022) 138 taxmann.com 341 to establish that interest income linked to infrastructure financing qualifies under Section 80IA. The consistent treatment of such income in prior years further supported its claim.

The Court's Analysis

The Tribunal examined the nature of RECs under the CERC and RERC framework and found them to be an integral part of the consideration for electricity sold, not a separate incentive. The PPA explicitly granted ownership of RECs to the power producer and provided for a fallback to preferential tariff pricing, indicating that the REC mechanism was a pricing alternative, not a subsidy or grant. The Tribunal rejected the Department’s reliance on Pandian Chemicals and Liberty India, distinguishing those cases where subsidies or unrelated income were claimed. Here, the REC income was directly tied to the volume of electricity generated and sold, forming part of the total revenue stream.

"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 also."

The Tribunal further held that the interest income earned on fixed deposits was not an independent source of income but a corollary of the financing arrangement essential to the eligible business. The deposits were maintained as margin money for loans used exclusively to purchase plant and machinery for solar power generation. Since the interest expense on these loans was allowed as a deduction, the interest income from the margin deposits was a natural offset, reflecting the net cost of financing. The Tribunal found the Department’s reliance on Conventional Fasteners misplaced, as that case involved interest on deposits for bank guarantees unrelated to core infrastructure activity. Here, the deposits were directly linked to capital expenditure for eligible business.

The Tribunal emphasized the principle of consistency, noting that the income from RECs and interest on deposits had not been disallowed in preceding or subsequent years, reinforcing the legitimacy of the assessee’s position. The Tribunal concluded that both forms of income were sufficiently proximate to the eligible business under Section 80IA and satisfied the "derived from" requirement.

The Verdict

The appeal by the Department was dismissed. The Tribunal upheld the order of the National Faceless Appeal Centre dated 15.10.2024, deleting the disallowance of Rs. 5,64,43,387 relating to income from Renewable Energy Certificates and Rs. 25,37,807 relating to interest income on fixed deposits under Section 80IA. The Tribunal directed that the assessee’s claim for deduction under Section 80IA for these amounts be allowed in full for A.Y. 2018-19.

What This Means For Similar Cases

REC Income Is Part of Core Business Revenue

• Practitioners must now argue that income from RECs, when issued under a PPA with explicit linkage to electricity generation, qualifies as part of the consideration for the eligible business under Section 80IA.
• Tax authorities cannot treat RECs as separate incentives or second-degree income if the regulatory framework and contractual terms integrate them into the pricing mechanism.
• Documentation must clearly show the contractual and regulatory nexus between REC issuance and power generation.

Interest on Financing Deposits May Qualify for Deduction

• Interest earned on deposits made as margin money for loans used to finance eligible infrastructure may be eligible for deduction under Section 80IA if directly linked to capital expenditure.
• The deduction is strengthened when interest expense on the corresponding loan is allowed, creating a balanced accounting treatment.
• Practitioners should maintain clear records linking deposit amounts to specific loans and their use for infrastructure.
• The Odisha Power Generation precedent now provides strong support for this position in power generation cases.

Consistency in Tax Treatment Is a Valid Consideration

• A consistent practice of treating similar income as eligible in prior years can support the assessee’s position, especially where the underlying facts remain unchanged.
• Sudden disallowance without a change in facts or law may be challenged as arbitrary or discriminatory.
• Taxpayers should document and preserve past assessments to reinforce consistency arguments in litigation.