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Issues: (i) Whether disallowance under section 14A could be made by invoking Rule 8D where the assessee had made a reasonable suo motu apportionment of expenditure attributable to exempt income. (ii) Whether electricity duty paid on captive power consumption was required to be reduced while computing profits eligible for deduction under section 80IA.
Issue (i): Whether disallowance under section 14A could be made by invoking Rule 8D where the assessee had made a reasonable suo motu apportionment of expenditure attributable to exempt income.
Analysis: The assessee had apportioned treasury-related salary and overhead expenditure on a rational basis to determine the amount relatable to investments yielding exempt income. The invocation of Rule 8D was rejected because the absence of separate books of account, by itself, was not sufficient to discard a reasonable computation. The approach was held to be consistent with the principle that disallowance under section 14A must rest on a fair and reasonable basis rather than an automatic mechanical application of Rule 8D.
Conclusion: The disallowance under section 14A read with Rule 8D was deleted and the assessee's suo motu disallowance was accepted.
Issue (ii): Whether electricity duty paid on captive power consumption was required to be reduced while computing profits eligible for deduction under section 80IA.
Analysis: The tariff structure treated the notified electricity rate as exclusive of electricity duty, and the duty was separately leviable on the consumer under the governing electricity tax law. On that basis, inclusion of electricity duty as part of generation cost would have required a corresponding adjustment in revenue as well, making the exercise revenue neutral. The profits of the eligible undertaking were therefore to be computed on the tariff value without reducing electricity duty as an additional cost component.
Conclusion: The reduction of electricity duty from the profits eligible for deduction under section 80IA was held to be unjustified.
Final Conclusion: The assessee succeeded on both substantive issues, while the Revenue's objections were rejected.
Ratio Decidendi: A reasonable and bona fide apportionment of expenditure attributable to exempt income cannot be displaced by a mechanical invocation of Rule 8D merely because separate books are not maintained, and profits of an eligible captive power undertaking must be computed on the real market tariff basis without making a revenue-neutral electricity duty adjustment.
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