2025 (6) TMI 898 - AT - Income Tax

Tribunal allows Section 80-IA deduction against gross total income, deletes CSR donation disallowance under Section 80G

DCIT, Circle-11 (1), Kolkata Versus Phillips Carbon Black Ltd. And Phillips Carbon Black Ltd. Versus ACIT, Circle- 11 (1), Kolkata

ITAT Kolkata allowed partial relief to the assessee in a transfer pricing and deduction dispute. The tribunal upheld CIT(A)'s direction allowing Section ... TP Adjustment in relation to transfer value of power by CPPs to manufacturing unit and consequent disallowance of deduction claimed u/s 80-IA - HELD THAT:- Hon'ble Calcutta High Court in the case of ITC Ltd. [2015 (7) TMI 450 - CALCUTTA HIGH COURT] after taking note of the decision of CIT Vs Jindal Steel & Power Ltd. [2023 (12) TMI 417 - SUPREME COURT] wherein their earlier decision in the case of ITC Ltd. [2015 (7) TMI 450 - CALCUTTA HIGH COURT] was reversed, since upheld the decision of the Hon'ble ITAT [2025 (2) TMI 766 - CALCUTTA HIGH COURT]. It is also material to mention that the Hon'ble ITAT, Kolkata in ITC Ltd's own case for subsequent AY 2009-10 [2019 (4) TMI 1574 - ITAT KOLKATA] have also expressed a divergent view as expressed in their own case by Hon'ble Calcutta High Court in FY 2001-02 by holding that the said judgment has since been reversed by Hon'ble Supreme Court and following the ratio decidendi laid down therein, the assessee's benchmarking methodology viz., the price at which the manufacturing units procures power from SEB, was held to be appropriate ALP. Partial Disallowance of deduction u/s 80-IA by restricting the same to the extent of 'Business Income' instead of 'Gross Total Income' - CIT(A)'s action directing the AO to allow the deduction claimed by the assessee under Chapter VI ie. Section 80- IA and 80G of the Act against the 'Gross Total Income' instead of 'Business Income' - HELD THAT:- A question which was put up for consideration before the Hon'ble Apex Court, whether the quantum of deduction u/s 80IA has to be restricted by treating 'eligible business' as the only source of income' or whether it can be allowed against any source even other than business income, and Hon'ble Supreme Court in the case of CIT vs Reliance Energy Limited [2021 (4) TMI 1237 - SUPREME COURT] answered the question in favour of the assessee by holding that the deduction u/s 80IA has to be allowed with reference to the gross total income' and not the 'business income' alone. Further Reliance in this regard is also placed on V.M. Salgaocar & Brother (P.) Ltd [2015 (4) TMI 1108 - BOMBAY HIGH COURT] involving similar facts as involved in the appellant's case. In the decided case, the eligible deduction u/s 80HHC was quantified at Rs. 19,78,94,900/-. The assessee had claimed such deduction from its gross total income to arrive at the taxable income. In the assessment order, the AO restricted the claim of deduction u/s 80HHC to the extent of Rs. 17,40,33,719/-being the profits and gains of the business as opposed to the gross total income of Rs. 19,78,94,900/-. On appeal, the High Court allowed the claim of the assessee and held that the deduction under Section 80HHC is required to be capped to the gross total income and not the profits & gains from the business. Disallowance of deduction claimed in respect of CSR donations u/s 80G - HELD THAT:- identical disallowance was also made by the AO in the assessee's own case for AY 2020-21 wherein the CSR donations claimed as deduction u/s 80G of the Act was disallowed. On appeal the Ld. CIT(A) in his appellate order had deleted the same by following the impugned appellate order for AY 2018-19. It is submitted that the Revenue has not preferred any appeal on this issue in AY 2020-21 and the same has attained finality. In that view of the matter, when the Revenue itself has accepted the decision of the CIT(A) on this same issue in the subsequent AY 2020-21, the impugned ground raised in AY 2018-18 has no legs to stand on. Disallowance of club expenses - Assessee submitted the club expenses were incurred for the purposes of business and therefore the same ought to have been allowed u/s 37(1) - HELD THAT:- It would be noted that the club expenses have been consistently incurred by the assessee over the years and there has not been any major variation and/or change in the trend of expenses. It is pertinent to submit that, in none of the past or succeeding years, whose assessments were completed u/s 143(3) of the Act, has the Department disputed the allowability of the club expenses and full deduction in respect of the same has been allowed. Disallowance u/s 14A r/w Rule 8D(2)(ii) - We do not find any infirmity in the impugned order passed by the Ld. CIT(A) on the issued involved except the issue relates to the disallowance u/s 14A of the Act that will discuss in deciding the appeal of the assessee. Accordingly, the appeal filed by the revenue is hereby dismissed to the extent of issue as discussed above. Denial of Weighted deduction claimed u/s 35(2)(ab) - CIT(A) confirmed the order of AO on this issue for want of form 3CL - HELD THAT:- We find substance in the argument of the assessee that the assessee has to give an opportunity to place form 3CL as the assessee received form 3CL issued by DSIR from 04.04.2024 as the order passed by the CIT(A) only on this ground that the assessee did not file form 3CL. Accordingly, we are restoring the appeal of the assessee to the file of AO on this issue to decide afresh. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:Whether the Transfer Pricing Officer's (TPO) downward adjustment to the transfer price of power supplied by the assessee's captive power plants (CPPs) to its manufacturing units, and consequent disallowance of deduction claimed under Section 80IA of the Income Tax Act, 1961 (the Act), was justified.Whether the deduction under Section 80IA of the Act should be restricted to business income or allowed against the gross total income.Whether Corporate Social Responsibility (CSR) donations made to charitable institutions registered under Section 80G of the Act qualify for deduction under Section 80G, despite being mandatory under the Companies Act, 2013.Whether the disallowance under Section 14A read with Rule 8D of the Act, relating to expenditure incurred to earn exempt income, was correctly computed and applied.Whether club expenses incurred by the assessee are allowable as business expenses under Section 37(1) of the Act.Whether the weighted deduction claimed under Section 35(2AB) of the Act was rightly disallowed due to non-filing of Form 3CL, and whether the assessee should be allowed an opportunity to submit the said form.2. ISSUE-WISE DETAILED ANALYSIS(i) Transfer Pricing Adjustment and Disallowance of Deduction under Section 80IARelevant legal framework and precedents: Section 80IA provides deduction for profits and gains derived from specified industrial undertakings or enterprises. Section 80IA(8) defines 'market value' for goods or services transferred within an enterprise. Transfer Pricing provisions under Sections 92 to 92F of the Act regulate arm's length pricing (ALP) for specified domestic transactions. The Transfer Pricing Officer applied the Comparable Uncontrolled Price (CUP) method as the most appropriate method (MAM) to determine ALP.Key precedents include the Hon'ble Supreme Court decision in CIT vs. Jindal Steel & Power Ltd., which reversed the earlier Calcutta High Court decision in CIT vs. ITC Ltd. The Supreme Court held that for captive power plants supplying power to industrial units, the market value should be benchmarked against the price at which the State Electricity Board (SEB) supplies power to industrial consumers, not the price at which the power plant sells surplus power to the SEB.Court's interpretation and reasoning: The Tribunal noted that the TPO relied on the Calcutta High Court decision in ITC Ltd., which was subsequently reversed by the Supreme Court. The Tribunal held that the assessee's benchmarking methodology-valuing power transfer at the rate at which the manufacturing units purchase power from the SEB-was consistent with the Supreme Court's ruling. The Tribunal further relied on a later Calcutta High Court decision in CIT vs. Star Paper Mills Ltd., which followed the Supreme Court's precedent and upheld the same benchmarking approach.Application of law to facts: The assessee's CPPs supplied power entirely consumed by its manufacturing units. The power was benchmarked at SEB rates for respective states (West Bengal, Kerala, Gujarat). The TPO's downward adjustment and disallowance of deduction under Section 80IA were based on an incorrect benchmarking methodology. The Tribunal found no infirmity in the CIT(A)'s order deleting the disallowance.Treatment of competing arguments: The Revenue argued that the TPO's CUP method and benchmarking against power sold to the SEB was correct, emphasizing Rule 10B(2)(b) on comparability factors. The assessee countered by citing binding Supreme Court authority and consistent judicial decisions supporting its methodology. The Tribunal favored the assessee's position based on binding precedents.Conclusion: The Tribunal upheld the CIT(A)'s deletion of the disallowance and accepted the assessee's benchmarking methodology for transfer pricing adjustment under Section 80IA.(ii) Restriction of Deduction under Section 80IA to Business Income or Gross Total IncomeRelevant legal framework and precedents: Section 80IA allows deduction of profits and gains from specified businesses. The question was whether the deduction should be limited to the profits and gains from the eligible business or allowed against the gross total income. The Supreme Court in CIT vs. Reliance Energy Ltd. held that the deduction under Section 80IA is to be allowed with reference to the gross total income and not restricted to business income alone. The Bombay High Court in V.M. Salgaocar & Brother (P.) Ltd vs. CIT held similarly for Section 80HHC.Court's interpretation and reasoning: The Tribunal followed the Supreme Court and Bombay High Court rulings, holding that the deduction under Section 80IA must be allowed against gross total income, not restricted to business income.Application of law to facts: The assessee claimed deduction exceeding business income but within gross total income. The AO restricted deduction to business income, leading to higher taxable income. The Tribunal found this restriction incorrect.Conclusion: The CIT(A)'s direction to allow the deduction against gross total income was upheld.(iii) Deduction for CSR Donations under Section 80GRelevant legal framework and precedents: Section 80G provides deduction for donations to specified charitable institutions. The Companies Act, 2013 mandates CSR expenditure under Section 135, leading to disputes on whether mandatory CSR donations qualify for deduction under Section 80G. Explanation 2 to Section 37(1) disallows expenditure not incurred wholly and exclusively for business purposes.Court's interpretation and reasoning: The Tribunal observed that Section 80G does not require donations to be voluntary to qualify for deduction. The legislature explicitly restricted deductions for CSR donations only to certain funds (Swachh Bharat Kosh and Clean Ganga Fund). Donations to other registered charitable trusts approved under Section 80G(6)(vi) are eligible for deduction. The Tribunal relied on multiple decisions of the jurisdictional ITAT, Kolkata, which allowed CSR donations as deductible under Section 80G despite being mandatory.Application of law to facts: The assessee made CSR donations to registered charitable trusts eligible under Section 80G. The AO disallowed deduction treating CSR donations as mandatory and thus non-voluntary. The Tribunal rejected this view and allowed deduction.Treatment of competing arguments: The Revenue contended that mandatory CSR donations are not voluntary and hence not deductible. The assessee argued that the manner and choice of charitable trusts were voluntary and legislative intent supported deduction. The Tribunal favored the assessee's interpretation.Conclusion: The CIT(A)'s deletion of disallowance on CSR donations was upheld.(iv) Disallowance under Section 14A read with Rule 8DRelevant legal framework and precedents: Section 14A read with Rule 8D provides for disallowance of expenditure incurred to earn exempt income. The AO invoked Rule 8D(2)(ii) to compute disallowance at 1% of average fair value of investments yielding exempt income. The assessee made suo-moto disallowance of a lesser amount.Court's interpretation and reasoning: The CIT(A) partly allowed the assessee's appeal by directing recomputation of disallowance restricting it to 1% of the cost of dividend-yielding investments. The Tribunal noted that the AO had not recorded objective satisfaction before invoking Rule 8D, a point raised by the assessee in a separate appeal.Application of law to facts: The assessee earned exempt dividend income and claimed disallowance accordingly. The AO's disallowance was higher than the assessee's suo-moto disallowance. The CIT(A) directed recomputation, balancing the competing contentions.Treatment of competing arguments: The Revenue insisted on full disallowance as per Rule 8D. The assessee argued lack of objective satisfaction and that no expenditure was relatable to exempt income. The Tribunal upheld the CIT(A)'s approach.Conclusion: The Tribunal upheld the CIT(A)'s order on disallowance under Section 14A, with directions for recomputation.(v) Allowability of Club ExpensesRelevant legal framework and precedents: Section 37(1) allows deduction of expenses incurred wholly and exclusively for business purposes. The tax auditor qualified club expenses as potentially non-allowable.Court's interpretation and reasoning: The Tribunal accepted the assessee's explanation that club memberships and expenses were incurred for business purposes such as networking, brand building, and conducting business meetings. The consistent incurrence of such expenses over multiple years without dispute by the Revenue supported their allowability.Application of law to facts: The assessee incurred club expenses for directors and senior employees to interact with customers and stakeholders. The Tribunal found these expenses to be business-related and allowable.Conclusion: The CIT(A)'s deletion of disallowance of club expenses was upheld.(vi) Weighted Deduction under Section 35(2AB) and Submission of Form 3CLRelevant legal framework and precedents: Section 35(2AB) provides weighted deduction for in-house research and development expenditure, subject to certification by the Department of Scientific and Industrial Research (DSIR) via Form 3CL.Court's interpretation and reasoning: The CIT(A) disallowed the weighted deduction due to non-filing of Form 3CL. The assessee subsequently obtained Form 3CL and requested opportunity to submit it.Application of law to facts: The Tribunal found merit in the assessee's contention and restored the issue to the AO for fresh adjudication after allowing the assessee to submit Form 3CL.Conclusion: The appeal on this issue was partly allowed by remanding the matter for fresh consideration.3. SIGNIFICANT HOLDINGS'The Hon'ble Supreme Court has held that the market value of the power supplied by captive power plants to an industrial unit should be computed by considering the rate at which the State Electricity Board supplied power to the industrial consumers in the open market and not by comparing it with the rate of power when sold by the Assessee to the State Electricity Board.''Section 80IA deduction has to be allowed with reference to the gross total income and not restricted to the profits and gains from the eligible business alone.''Section 80G does not stipulate that donations must be voluntary to qualify for deduction. Mandatory CSR donations to registered charitable trusts, except those specifically excluded by the legislature, are eligible for deduction under Section 80G.''Disallowance under Section 14A read with Rule 8D must be preceded by objective satisfaction and should be computed with reference to the cost of dividend-yielding investments, not merely the average fair value of all investments.''Club expenses incurred for business purposes such as networking and conducting business meetings are allowable deductions under Section 37(1).''Weighted deduction under Section 35(2AB) cannot be denied solely on the ground of non-filing of Form 3CL if the assessee subsequently obtains the certificate; the assessee must be given an opportunity to submit it.'Final determinations on each issue are as follows:The disallowance of deduction under Section 80IA based on transfer pricing adjustment was deleted, accepting the assessee's benchmarking methodology consistent with Supreme Court precedent.The deduction under Section 80IA was allowed against gross total income, not restricted to business income.Deduction claimed for CSR donations under Section 80G was allowed.Disallowance under Section 14A was partially upheld with directions for recomputation.Club expenses were allowed as business expenses.The issue of weighted deduction under Section 35(2AB) was remanded for fresh consideration after allowing submission of Form 3CL.