Sale of captive power deemed SDT; TPO's ALP binding on AO; s.14A and s.115J challenges dismissed; s.35(2AB) deduction allowed

ITAT, Mumbai upheld that sale of electricity between the captive power plant and the manufacturing unit qualified as an SDT but the TPO's finding that related-party transactions were at arm's length must be respected; AO cannot independently reassess ALP. Challenges to disallowances under s.14A (and its application to book profit u/s 115J) were dismissed following prevailing precedents. Deductions under s.35(2AB) and additional depreciation under s.32(1) were allowed as in prior years; depreciation for earlier foreign exchange loss was granted. First appellate authority rightly admitted and accepted claims that SHIS and fertilizer subsidies are capital in nature.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the Assessing Officer (A.O.) can ignore the Transfer Pricing Officer's (TPO's) determination that a Specified Domestic Transaction (sale of electricity by a captive power plant to the assessee's manufacturing unit) is at arm's length and independently determine Arm's Length Price (ALP) for purpose of deduction under section 80IA read with transfer-pricing provisions.

2. Whether disallowance under section 14A read with Rule 8D(2) should be computed by taking average value of only those investments which yielded exempt income during the year (methodology in Vireet Investment (P.) Ltd.).

3. Whether section 14A disallowance is applicable while computing book profit under section 115J.

4. Whether weighted deduction under section 35(2AB) can be disallowed where some prescribed documentation (agreement with prescribed authority, Form 3CL/DSIR approval) is not on record.

5. Whether additional depreciation under section 32(1)(iia) can be claimed in two separate assessment years for the same plant and machinery (purchase straddling two years).

6. Whether unrealised foreign-exchange loss added to block of plant & machinery in earlier year (treated as capital and forming part of opening WDV) can form basis for depreciation claim in later year.

7. (Common) Whether Status Holder Incentive Scrips (SHIS) and Fertilizer Subsidy are capital receipts (not taxable) and whether an appellate authority may entertain a fresh claim not accepted at assessment stage.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of A.O.'s independent ALP determination for SDT when TPO has found ALP at arm's length

Legal framework: Section 80IA(6)/(8) and Explanation thereto require deduction linked to ALP for specified domestic transactions; section 92F(ii), sections 92CA/92D govern TPO determination and finality of transfer-pricing adjustments; section 92BA defines SDT.

Precedent treatment: TPO made a reference under section 92CA and, after proceedings, accepted the assessee's reported ALP for both international and specified domestic transactions (order u/s 92CA(3)).

Interpretation and reasoning: The Court observed that the sale of electricity by the captive power plant to the manufacturing unit is an SDT and, therefore, the ALP determination must follow transfer-pricing procedure. Once the TPO has determined SDTs to be at arm's length with no adjustment, the A.O. cannot selectively accept TPO findings for some transactions (international ones) and reject them for SDTs; doing so would defeat the statutory scheme. The A.O.'s invocation of market tariff data and alternative hypothetical sales to distribution companies could not supplant the TPO's statutory analysis.

Ratio vs. Obiter: Ratio - TPO's ALP determination for SDTs is binding on the A.O. for purposes of eligibility/quantum of deduction under section 80IA; A.O. cannot independently re-determine ALP in contradiction to TPO when TPO has considered the SDT.

Conclusion: The A.O.'s partial override of the TPO's ALP for the electricity SDT is unsustainable; deduction under section 80IA must be limited to amount corresponding to the ALP as determined by transfer-pricing process. Ground dismissed.

Issue 2 - Computation of disallowance under section 14A using Rule 8D(2)

Legal framework: Section 14A (expenditure in relation to exempt income) and Rule 8D(2)/(3) prescribe methodology to compute disallowance; judicial interpretation in Special Bench precedents addresses which investments to include for average value computation.

Precedent treatment: ITAT Special Bench in Vireet Investment (P.) Ltd. held that while applying Rule 8D(2)(iii) only those investments which yielded exempt income during the relevant previous year should be considered in computing the average investment for disallowance.

Interpretation and reasoning: The A.O.'s recomputation using total investment at year-end produced a much larger disallowance. The Tribunal followed the Special Bench ratio that limits the investment base to those assets that actually produced exempt income in the year, and further held that if the statutory computation yields a figure less than the assessee's self-disallowance, the lower figure (suo moto amount) should prevail.

Ratio vs. Obiter: Ratio - application of Vireet Investment principle to restrict the investment base for Rule 8D(2) computation to investments yielding exempt income; direction to cap the computed disallowance by assessee's self-disallowance if lower.

Conclusion: A.O.'s higher disallowance under section 14A is set aside; disallowance must be computed per Vireet Investment (P.) Ltd. and restricted appropriately. Ground dismissed.

Issue 3 - Applicability of section 14A disallowance while computing book profit under section 115J

Legal framework: Section 115J (book profit for MAT) and interaction with section 14A.

Precedent treatment: Vireet Investment (P.) Ltd. (Special Bench) held that section 14A provisions do not apply while computing book profit under section 115J.

Interpretation and reasoning: Consistent coordinate-bench decisions in earlier assessment years of the same assessee applied the Special Bench ratio to exclude section 14A adjustments from book-profit computation. The Tribunal accepted these precedents as binding on facts identical to the present year.

Ratio vs. Obiter: Ratio - section 14A disallowance is not to be made for computing book profit under section 115J.

Conclusion: The A.O.'s disallowance under section 14A while computing book profit is unsustainable. Ground dismissed.

Issue 4 - Allowability of weighted deduction under section 35(2AB) despite alleged non-compliance with prescribed conditions

Legal framework: Section 35(2AB) provides weighted deduction for specified scientific research expenditure subject to statutory conditions and approvals (e.g., DSIR approval, Form 3CL where applicable).

Precedent treatment: Coordinate-bench decisions in the assessee's earlier assessment years consistently allowed the claim on comparable facts.

Interpretation and reasoning: The Tribunal relied on consistent prior decisions in the assessee's own case where identical claims were allowed; in view of those precedents and the similarity of facts, the appellate decision to allow the deduction was affirmed. The Tribunal did not find fresh justification to depart from the co-ordinate bench view.

Ratio vs. Obiter: Ratio - where identical factual matrix and previous coordinate-bench rulings have allowed the deduction, such view is followed; no separate finding that statutory conditions were in fact absent was made.

Conclusion: Disallowance of weighted deduction under section 35(2AB) is reversed following consistent tribunal precedent. Ground dismissed.

Issue 5 - Claim of additional depreciation u/s 32(1)(iia) over two assessment years

Legal framework: Section 32(1)(iia) permits additional depreciation for notified assets acquired/installed in specified period; interaction when purchase/installation spans two years is litigated.

Precedent treatment: Coordinate-bench decisions in the assessee's earlier assessment years held in favour of allowing additional depreciation on facts analogous to the present year.

Interpretation and reasoning: Applying the co-ordinate-bench precedent (identical facts), the Tribunal found no reason to disturb the appellate allowance of additional depreciation. The Tribunal treated the coordinate bench rulings as determinative for the facts at hand.

Ratio vs. Obiter: Ratio - where prior tribunal decisions on identical factual matrix permit additional depreciation notwithstanding timing across years, they are followed.

Conclusion: A.O.'s disallowance of additional depreciation is not sustained. Ground dismissed.

Issue 6 - Depreciation claim based on opening WDV incorporating earlier unrealised foreign-exchange loss

Legal framework: Section 32 regarding depreciation; treatment of foreign exchange differences and whether unrealised loss added to block of assets can form part of WDV.

Precedent treatment: Earlier assessment years of the assessee accepted depreciation on opening WDV which included foreign-exchange difference; coordinate-bench decisions have allowed such treatment.

Interpretation and reasoning: The Tribunal observed recurring adjudication on the issue in favour of the assessee and noted that the A.O. had earlier accepted the factual position. Respectfully following coordinate-bench rulings, the Tribunal found no infirmity in allowing depreciation based on the opening WDV inclusive of the earlier treated capitalised forex loss.

Ratio vs. Obiter: Ratio - where identical prior findings and factual acceptance exist, depreciation on opening WDV including capitalised unrealised forex loss is allowable.

Conclusion: Disallowance of depreciation in respect of capitalised foreign-exchange loss is set aside. Ground dismissed.

Issue 7 - Nature of SHIS and Fertilizer Subsidy (capital or revenue) and entertainability of fresh claim before appellate authority

Legal framework: Principles distinguishing capital receipts from revenue receipts; appellate powers to entertain claims not accepted at assessment where relevant facts were before A.O.; effect of subsequent amendment to the definition of income not retrospective.

Precedent treatment: Coordinate-bench decisions (including decisions in the assessee's own case and sister concerns) have held SHIS and fertilizer subsidies to be capital receipts; Supreme Court and other authorities on comparable schemes cited in reasoning (e.g., cases treating incentive receipts as capital where linked to capital investment/technology upgradation).

Interpretation and reasoning: On admissibility, Tribunal held appellate authorities may entertain fresh claims where facts supporting the claim were already on record at assessment. On merits, the Tribunal followed coordinate-bench findings that SHIS (linked to technology upgradation and capital investment; scrips with actual user condition for capital goods) and fertilizer subsidy are capital receipts and thus not taxable under normal provisions nor includible in book profit for section 115JB. The Tribunal rejected Revenue's reliance on a post-fact amendment to the definition of income as not retrospectively applicable to the assessment years in question.

Ratio vs. Obiter: Ratio - appellate authority can admit a fresh claim where the factual basis was available in assessment records; SHIS and fertilizer subsidy are capital receipts on the facts of these years and not taxable for the years under consideration; retrospective application of later legislative amendment rejected.

Conclusion: The appellate admission of the claim was proper; on merits SHIS and fertilizer subsidy are capital receipts and not taxable for the relevant years. Grounds dismissed.

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