2025 (9) TMI 167 - AT - Income Tax

Rule 8D/Section 14A disallowance deleted; assessee's expense apportionment reasonable; suo moto revised disallowance treated as Section 14A; electricity duty rejected

I.T.C. Limited Versus DCIT, Circle-8, Kolkata And (Vice-Versa)

I.T.C. Limited Versus DCIT, Circle-8, Kolkata And (Vice-Versa) - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D of the Rules can be determined by applying Rule 8D where the assessee has made a reasoned suo moto apportionment of expenses relating to exempt income notwithstanding non-maintenance of separate books of account for investment activity. 2. Whether electricity duty paid on captively consumed power must be included in or excluded from the computation of 'profits and gains' eligible for deduction under section 80IA when market value of electricity transferred to the assessee's own units is determined by the State tariff which is exclusive of electricity duty. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 14A and Rule 8D where assessee makes suo moto apportionment of expenses for exempt income despite not maintaining separate books Legal framework: Section 14A disallows expenditure in relation to income which does not form part of total income. Rule 8D prescribes methodology for computing disallowance (including formulas and apportionment) where disallowance is required to be computed by the assessing authority. Precedent treatment: The Tribunal and appellate authorities in earlier rounds invoked Rule 8D when not satisfied with the assessee's computation, citing absence of separate accounts; however, higher judicial authority (Apex Court) and coordinate benches have held that where the assessee's suo moto disallowance is reasonable and borne out by the accounts, Rule 8D need not be automatically applied. High Court decisions upholding coordinate bench findings were relied on by the assessee. Interpretation and reasoning: The Court examined whether non-maintenance of separate books per se invalidates a reasonable apportionment. It accepted that separate books are not mandatory where the assessee's computation is consistent, logical and reasonably linked to the accounts. The assessee had detailed facts: identification of treasury and forex verticals, quantification of salaries/overheads of the treasury vertical, and an apportionment methodology based on ratio of investments capable of yielding exempt income to total assets, producing a specific suo moto disallowance figure. The AO's exclusive reliance on absence of separate investment books and the conclusion that the assessee's computation had 'no relation with its accounts' were held insufficient to displace a reasonable apportionment supported by account details and consistent methodology. Where the assessing officer is not satisfied with correctness, Rule 8D can be invoked, but invocation is not automatic where the assessee's own disallowance is reasonable and demonstrably linked to its accounts. Ratio vs. Obiter: Ratio - The principle that a taxpayer's suo moto reasonable and account-linked disallowance under section 14A can be accepted even if separate books for investment activity are not maintained; Rule 8D is not mandatorily applicable in such cases. Obiter - Remarks on comparative authority decisions and generalized comments on bookkeeping requirements. Conclusion: The Court set aside the disallowance computed by the AO and confirmed the assessee's suo moto disallowance (to be treated as disallowance under section 14A read with Rule 8D), directing deletion of the excess addition. The ground in favour of the assessee is allowed. Issue 2: Treatment of electricity duty in computation of profits eligible for deduction under section 80IA when market value is determined by State tariff exclusive of duty Legal framework: Section 80IA provides that where goods or services of an eligible business are transferred to another business of the assessee at non-market consideration, profits are to be computed as if transfer was at market value; explanation defines market value as price ordinarily fetched in open market. Statutory/ regulatory tariff orders set the applicable market tariff; separate statutory provisions govern electricity duty/ tax and its collection/payment. Precedent treatment: Prior orders of AO and Tribunal took divergent positions; appellate authority allowed assessee; coordinate and higher judicial decisions considered whether market value for section 80IA includes statutory duties where tariff orders expressly exclude such duties and licensees/consumers bear the duty separately. Interpretation and reasoning: The Court examined the tariff order showing that State tariff rates are exclusive of electricity duty and statutory provisions requiring collection/payment of electricity duty by licensee or consumer when energy is self-consumed. Given tariff exclusivity, including electricity duty in cost of generation without including a corresponding recovery in market value would distort profit computation. The electricity duty is mandated to be paid/collected separately and, in the assessee's accounts, the revenue was computed on tariff exclusive of duty with disclosure in notes; electricity bills demonstrated separate duty component. Treatment of electricity duty as cost would require adding an equal amount to revenue to reflect market value, rendering the adjustment revenue neutral. Therefore, AO's addition (reducing eligible profit by the duty) was incorrect where market value used for section 80IA excluded the duty. Ratio vs. Obiter: Ratio - Where the notified market tariff for electricity is expressly exclusive of statutory electricity duty and the assessee's revenue is computed on that tariff (with disclosure), electricity duty payable on captive consumption should not be separately reduced from profits eligible for deduction under section 80IA because inclusion of duty in cost without corresponding inclusion in market value would be inappropriate; the correct result is revenue neutrality and exclusion of the duty from the reduction. Obiter - References to specific statutory provisions on duty collection mechanism and illustrative effect on electricity bills. Conclusion: The Court upheld the appellate authority's view in favour of the assessee and dismissed Revenue's contention; reduction of eligible profits by electricity duty was held improper where market value determination (State tariff) is exclusive of electricity duty and the accounts/relevant regulatory tariff treat duty separately. The revenue ground was dismissed and the assessee's claim under section 80IA was restored. Cross-references Decisions on Issue 1 relying on higher judicial authority and coordinate bench rulings were treated as binding in context; findings on Issue 2 rely on the interaction between tariff orders and statutory electricity duty provisions and the principle of revenue neutrality when market value excludes duty.