DCIT, CIRCLE 8, , KOLKATA V. M/S. ITC LTD, KOLKATA

ITA 1339/KOL/2012

AI Insights

The case involves cross-appeals by ITC Limited and the DCIT, Circle-8, Kolkata, concerning disallowances made under Section 14A of the Income Tax Act and the treatment of electricity duty in the computation of profits eligible for deduction under Section 80IA. The Tribunal had to decide on the appropriateness of the disallowance under Section 14A, Rule 8D, and whether the electricity duty should be included in the cost of generation while computing profits for Section 80IA. The Tribunal's decision was influenced by precedents and the interpretation of relevant statutory provisions, leading to the acceptance of the assessee's methodology in both respects.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 772198 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Assessment Year: 2008-2009
• Other Referred Cases: South Indian Bank Ltd. Vs. CIT, Ultratech Cement Ltd. Vs. ACIT, CIT vs. Ultratech Cement Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P.N. BARNWAL
• Assessee Lawyers: J P KHAITAN; BIKASH CHANDA; ARS
• Keywords: Set aside; Question of law; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, KOLKATA BEFORE SHRI RAJESH KUMAR, AM AND SHRIPRADIP KUMAR CHOUBEY, JM ITA Nos. 1144/KOL/2012 &685/KOL/2014 (Assessment Years: 2008-09 & 2009-10) I.T.C. Limited 37, J.L. Nehru Road, Kolkata-700001 West Bengal Vs. DCIT, Circle-8, Kolkata Aayakar Bhavan, 5 th floor, Room No.8, P-7, Chowringhee Square, Kolkata-700069, West Bengal (Appellant) (Respondent) ITA Nos. 1339/KOL/2012 & 1267/KOL/2014 (Assessment Years: 2008-09 & 2009-10) DCIT, Circle-8, Kolkata Aayakar Bhavan, 5 th floor, Room No.8, P-7, Chowringhee Square, Kolkata-700069, West Bengal Vs. I.T.C. Limited 37, J.L. Nehru Road, Kolkata-700001 West Bengal (Appellant) (Respondent) PAN No. AAACI5950L Assessee by : Shri JP Khaitan & Shri Bikash Chanda, ARs Revenue by : Shri P.N. Barnwal, DR Date of hearing: 16.07.2025 Date of pronouncement: 26.08.2025 O R D E R Per Rajesh Kumar, AM: These Cross appeals are against the orders of the Commissioner of Income-tax (Appeals), Kolkata (hereinafter referred to as the “Ld. CIT(A)”] dated 25.03.2014 for the AY 2008-09 & 2009-10. Printed from counselvise.com Page | 2 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 02. This is the second round of litigation before the Tribunal. In the first round the Tribunal upheld the order of the ld. CIT (A) confirming the disallowance made by the ld. AO u/s 14A of the Act on the ground that the assessee had not maintained separate details or accounts in order to account for the expenditure incurred in respect of investment activity and in relation to income which did not form part of the total income and therefore, the assessee’s computation could not be accepted as correct. It was also noted that suo moto disallowance made by the assessee had no relation with its accounts and could not be correct. 03. The said matter travelled upto to High Court and Hon'ble High Court vide order dated 17th September,2019, in ITAT No. 40 of 2015 in GA No. 672 of 2015 and ITAT No. 96 of 2019 in GA No. 1128 of 2019 for A.Y.s 2009-10 and, set aside the Tribunal orders restoring the issue back to the file of the Tribunal for deciding legal and factual issue arising out of Section 14A of the Act as well as 80IA of the Act. There are two issues before us to be adjudicated first in respect of disallowance u/s 14A and second whether the reduction of electricity duty in competition of profits eligible for deduction under Section 80IA of the Act is to be made. First, we shall adjudicate the A.Y. 2008-09. ITA No. 1144/KOL/2012 for A.Y. 2008-09 04. The first issue which is ground no.2 of the assessee’s appeal for A.Y. 2008-09, is against the disallowance u/s 14A of the Act read with Rule 8D of the Rules. 05. The facts in brief are that the assessee earned exempt income of ₹235.40 crores which comprised of interest from tax-free bonds Printed from counselvise.com Page | 3 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 amounting to ₹23.84 crores and dividends amounting to ₹211.56 crores received from investments in equity shares and units of mutual funds. The total investments were comprised of two components one capable of yielding exempt income and second which are not capable of yielding exempt income. The assessee has carried out diverse business activities such as manufacture and sale of paper board and specialty paper, operation of hotels, manufacture and sale of cigarettes, packaging and & printing business and agri business etc. During the year under consideration, the assessee invested its surplus funds from such business activities, inter alia, in shares and securities some of which gave rise to exempt dividend income and tax-free interest. The Corporate Treasury Department of the Assessee is responsible for handling the working capital/banking functions and the foreign exchange requirements apart from handling the investments of surplus funds of the Assessee. The Corporate Treasury Department of the Assessee comprised of two verticals: (1) the Foreign Exchange Vertical, which is not involved in investment activities and (ii) the Treasury Vertical, which is essentially responsible for the treasury/banking functions and also investment of Assessee's surplus funds in various instruments yielding dividends/interests etc. 06. The salary in respect of the Corporate Treasury Department (which is responsible for all investment decisions) for the previous year ended 31 March 2008 relevant to the AY 2008-09 aggregated to Rs. 1.17 crores comprising Rs. 0.74 crores on account of Treasury Vertical and Rs. 0.43 crores on account of Foreign Exchange Vertical (Please see page 7 of Paper Book for AY 2008-09). Further, the expenses/overheads of the Corporate Treasury Department for the Printed from counselvise.com Page | 4 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 said previous year aggregated to Rs. 1.44 crores [Please see page 14 of Paper Book for AY 2008-09). The total expenses of the Corporate Treasury Department for the said previous year comprising salaries and overheads of both the Treasury and Forex Verticals was Rs. 2.61 crores (Please see page 4 of Paper Book for AY 2008-09). The Assessee was required to ascertain the appropriate portion of the said expenses (salaries and overheads) referable to the handling of its investments which could yield exempt income. The salaries and over heads of the Foreign Exchange Vertical was excluded altogether as the said vertical had nothing to do with the Assessee's investment function. However, the salaries of the Treasury Vertical had to be apportioned as the employees performed multiple functions, one of which was handling investments. The Assessee apportioned the salaries of the Treasury Vertical of Rs. 0.74 crores in the ratio of its investments which could yield exempt income to the total assets as per its balance-sheet as on 31 March 2008. On such basis, 20% of the salaries of the Treasury Vertical, Le., Rs. 14,71,903 was attributed to the handling of the Assessee's investments which could have yielded exempt income .Please see page to of Paper Book for AY 2008-09 The next step was to apportion the other expenses/overheads relatable to the investments which could have yielded exempt income. As stated hereinabove, the expenses/overheads relating to the Corporate Treasury Department was apportioned in the ratio between salaries of the Treasury Vertical to the total salaries of the Corporate Treasury Department (ie. Rs. 1.44 crores Rs. 0.74 crores/Rs. 1.17 crores Rs. 0.91 crores). Adopting the same apportionment ratio as in respect of salaries, 20% of the figure so obtained, i.e., Rs. 18,24,432 was considered as other expenses/overheads relatable to handling of the Printed from counselvise.com Page | 5 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 Assessee's investments which could have yielded exempt income (Please see page 10 of Paper Book for AY 2008-09). Thus, the aggregate apportioned expenditure (salaries and expenses/overheads) incurred in relation to the handling of the Assessee's investments which could have yielded exempt income amounted to Rs. 32,96,400 for AY 2008-09 [Please see page 9 of Paper Book for AY 2008-09) as submitted before the AO during assessment proceedings. On the same basis as adopted for AY 2008-09, the aggregate apportioned expenditure (salaries and expenses/overheads) incurred in relation to the handling of the Assessee's investments which could have yielded exempt income amounted to Rs. 35,02,909 for AY 2009-10 [Please see pages 39 to 40 of Paper Book for AY 2009-10]. In AY 2009-10, in the return of income, the Assessee had computed the disallowance of Rs. 43.59,012 [Please see page of Paper Book for AY 2009-10] by taking into consideration its entire investments (and not only those investments which could yield exempt income) which has since been corrected to Rs. 35,02,909 as aforesaid.It can be observed from the above that the methodology adopted by the Assessee for determining expenditure to be disallowed under section 14A of the Act is consistent, logical and reasonable. 07. According to the ld. AO, the suo moto disallowance computed by the assessee at ₹37,90,800/-as offered by the assessee in the assessment proceedings by way of revised computation is not correct for two reasons; (i) the assessee had not maintained separate details or accounts in order to account for the expenditure incurred in respect of investment activity and (ii)suo moto disallowance was made by the assessee has no relation with its accounts and therefore not correct. Printed from counselvise.com Page | 6 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 The ld. AO thereafter computed the disallowance u/s 14A of the Act at ₹13.51 crores and addition of ₹13,48,20,800/- was made after reducing suo moto disallowance amounting to ₹2,52,700/- offered in the return of income. 08. In the appellate proceedings, the ld. CIT (A) confirmed the view of the ld. AO by upholding that the ld. AO was justified in invoking the provisions of Rule 8D, since, he was not satisfied with the correctness of the assessee’s computation of disallowance u/s 14A of the Act, which was also confirmed by the Tribunal for the same reasons. 09. The assessee at the outset submitted that the issue is squarely covered by the decision of Kolkata Tribunal in assessee’s own case for A.Y. 2010-11, in ITA no. 1068/KOL/2017 and 1222/KOL/2017 and for A.Y. 2011-12, in ITA No. 1166/KOL/017 and 1223/KOL/2017, wherein on identical facts the Tribunal while accepting the methodology for suo moto disallowance computed by the assessee , held that Rule 8D of the Rules cannot be invoked if disallowance u/s 14A of the Act is done on reasonable basis. It was also submitted that the said decisions of the Tribunal were challenged by the Revenue before the Hon'ble Kolkata High Court and Hon'ble Kolkata High Court having considered the assessee’s case has dismissed the Revenue’s appeal vide orders dated 21st July, 2025, a copy of which is available at annexure no. 3 and 4. 010. The ld. Counsel for the assessee submitted that the main plea of the department as has been affirmed by the Tribunal in the first round that separate books of account not maintained for the expenditure incurred in relation to non-taxable income cannot be ground to reject Printed from counselvise.com Page | 7 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 the assessee’s apportionment of income incurred in relation to non- taxable of income. The ld. AR relied on the decision of Hon'ble Apex court in case of SouthIndian Bank ltd. Vs. CIT (2021) 130 taxmann.com 178 (SC). The ld. AR also relied on the decision of this Tribunal in case of Ultratech Cement Ltd. Vs. ACIT (2017) 88 taxmann.com 907 (Mum), in which the co-ordinate bench held that if the expenditure disallowed by the assessee suo moto has to be reasonable, there is no mandate in the Act to apply Rule 8D(2)(iii) of the Rules, while deciding the appeal for A.Ys. 2009-10 and 2010-11. The co-ordinate Benches relied on the decision of co-ordinate Bench decision in case of Ultratech Cement Ltd. Vs. ACIT [(2014) (4) TMI 663-ITAT Mumbai] pertaining to A.Y. 2007-08 and 2008-09. The ld. Counsel for the assessee also submitted that the Revenue has challenged the said order for A.Y. 2008-09 before the Hon'ble Bombay High Courtin CIT vs. Ultratech Cement Ltd. [2017 (2) TMI 1005- Bombay High Court] and the Bombay High Court upheld the order of the Tribunal by not admitting any question of law raised by the Department. 011. The Learned Council therefore prayed that disallowance offered by the assessee of ₹37,90,800 may kindly be accepted and the Learned AO may be directed to delete the remaining disallowance by reversing the order of the Learned CIT (A). 012. We have heard the rival contentions and perused the materials available on record. We find that this being a second round of litigation before us as the Hon'ble High Court of Calcutta restored back these appeals before us for the adjudication on facts as well as on legal issue. We note that in this case in the first round, the Printed from counselvise.com Page | 8 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 disallowance was confirmed by the Learned Tribunal by upholding the order of learned ld.CIT(A) which in turn upheld the order of the learned AO wherein the learned AO invoked the provisions of Rule 8D of the Rules on account of non-maintenance of separate books of accounts for accounting of the expenditurein relation to earning of exempt income and the computation furnished by the assessee having no relation to the accounts and therefore, not correct. In this case, undisputedly the assessee has not maintained separate books of accounts as observed by the learned AO /CIT (A)/Tribunal, which in our opinion is not required to be maintained in view of the decision of the Hon'ble Apex Court in the case of South Indian Bank ltd. Vs. CIT (supra). Similar view has been expressed by the Bombay High Court in the case of CIT vs. Ultratech Cement Ltd. (Supra) forA.Y. 2008-09 by upholding the order of the tribunal on this issue by dismissing the appeal of the revenue though no substantial question of law raised by the department. 013. Besides, we note that assessee has made a very rational and reasonable computation of expenses in regard to expenses incurred in relation to earning of exempt income by making an apportionment of expenses incurred by way of salary which was not being disputed by the department to be not correct but the only reason for disallowance was that no separate books of accounts were maintained and the expenses offered by the assessee under section 14A Rule 8D of the Rules were not having any relation with the accounts and therefore, not correct. Now the issue is clearly covered by the decision in A.Ys. 2010-11 and 2011-12. We therefore, respectively, following the decision of the Coordinate Bench, in assessee's own case, for the Printed from counselvise.com Page | 9 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 aforesaid assessment year, set aside the order of the learned CIT (A) and direct the learned AO to delete the disallowance made under Section 14A Rule 8D of the Rules. It is further clarified that suo moto disallowance made by the assessee of ₹32,96,400 filed by way of revised computation needs to be treated as disallowance under Section 14A, Rule 8D of the Rules. Consequently, the ground raised by the assessee is allowed. ITA No. 1339/KOL/2012 for A.Y. 2008-09 (R.A) 014. The issue raised in Ground No. 2 by the revenue is qua the reduction of electricity duty in competition of profits eligible for deduction under Section 80IA of the Act. 015. The facts in brief are that for the impugned assessment, the assessee has claimed deduction under Section 80IA of the Act, amounting to ₹69,57,61,000/- in respect of profit derived from its captive power undertaking at Bhadrachalam and Kovai while computing the eligible profit of these undertakings. The market value of the electricity generated and captively consumed was based on the tariff rates of the relevant State Electricity Board (SEB). The assessee is also required to pay the electricity duty at the applicable rates on the electricity unit captively consumed and during the year the assessee paid a total electricity duty of ₹4,10,91,000/- is as under: - Name of the undertaking Deduction claimed under section 80IA (In Rs.) Power Undertaking, Bhadrachalam 13,94,75,000 Power Undertaking II, Bhadrachalam 21,11,40,000 Power Undertaking VI, Bhadrachalam 23,07,06,000 Power Undertaking I, Kovai 11,44,40,000 Total 69,57,61,000 Printed from counselvise.com Page | 10 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 Name of the undertaking Deduction claimed under section 80IA (In Rs.) Power Undertaking, Bhadrachalam 2,23,86,000 Power Undertaking II, Bhadrachalam 1,67,15,000 Power Undertaking I, Kovai 19,90,000 Total Electricity Duty 4,10,91,000 016. The assessee did not include the amount of aforesaid electricity duty while determining the cost of generation since a corresponding recovery of the said electricity duty was not included in the market value of the electricity transferred to its own units. According to the AO, the assessee, by claiming electricity duty has reduced eligible profit for deduction under Section 80IA of the Act to the extent of the electricity duty since the AO was of the view that it was an actual cost which should have been reduced while computing the profits eligible for deduction under Section 80IA of the Act. Accordingly, the same was added to the income of the assessee. 017. On Appellate proceedings, the Learned CIT (A) allowed the appeal of the assessee which was also reversed by the tribunal by restoring the order of the AO, by holding that the AO was correct in reducing the eligible profit by the amount of electricity duty. Now this issue has been set aside to the tribunal again by the Hon’ble High Court and hence, is being decided in the following Paras. 018. The ld. Counsel for the assessee submitted that Section 80IA of the Act, provides that where any goods or services held for the purpose of the eligible business are transferred to any other business carried on by the assessee and the consideration as recorded in the accounts does not correspond to the market value then for the Printed from counselvise.com Page | 11 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 purpose of deduction, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value as on that date. Further, explanation to Section 80IA(8) of the Act defines market value as the price that such goods would ordinarily fetch on sale in the open market. The ld. Counsel for the assessee submitted that the Hon'ble Apex Court in assessee’s own case for Assessment Year 02-03 in Civil Appeal No. 9920 of 2016 vide orders dated 6thDecember 2023 and 7thDecember 2023 has held that market value for the purpose of 80IA of the Act should be the rate at which SEB supplies power to the industrial consumers. The ld. Counsel for the assessee further invited the attention of the bench to the tariff order dated 20thMarch 2007 published by Andhra Pradesh Electricity Regulatory Commission which provides that tariff rates notified by the State Commission are exclusive of electricity duty. The ld. Counsel for the assessee submitted that since the assessee had computed the revenue in respect of the undertaking eligible for deduction under Section 80IA of the Act based on the tariff order, the assessee did not include the amount of electricity duty payable by it in the amount of revenue. Correspondingly, the same was also not included in the cost of generation. The ld. Counsel for the assessee further submitted that this was duly disclosed to the notes to accounts of the respective undertakings for A.Y. 2008-09. The ld. Counsel for the assessee further invited the attention of the Bench to the Tamil Nadu Electricity (Taxation on Consumption) Act 1962, which provides that every licensee must collect the electricity tax from the consumer and pay it to the government, and that every person who consumes energy generated by himself, such as a captive power producer, is also required to pay the electricity tax directly to the government. Printed from counselvise.com Page | 12 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 Therefore, the electricity duty is required to be calculated and paid as required to be collected and paid by the licensee from the consumers in addition to the tariff rates as is evident from the electricity bills received by the assessee from electricity board. The learned counsel submitted that a perusal of the electricity bills reveals that if the electricity duty is included in the cost of generation, then equal amount would also have to be included in the tariff rates of respective undertakings. In other words, the treatment of electricity duty in computing the eligible profits for deduction under Section 80IA of the Act would be revenue neutral. Therefore, reduction made by the ld. AO of electricity duty while computing the eligible profits is incorrect and may kindly be reversed. 019. On the other hand, the ld. Departmental Representative relied on the orders of the authorities below. 020. We have heard the rival contentions and perused the materials available on record. We find from the perusal of the tariff order dated 20thMarch 2007 proposed by Electricity Regulatory Authority and Section 5 of Tamil Nadu Electricity Taxation Consumption Act, 1962 that tariff rates notified by the said commission are exclusive of electricity duty and that every licensee must collect the electricity duty from the consumer and pay to the government. Therefore, we find merit in the contention of the assessee that the treatment of electricity duty as part of cost would be revenue neutral as in that scenario the equal amount has to be added to the revenue also. Therefore, we uphold the order of ld. CIT (A) by dismissing the ground number 2 of Revenue’s appeal. Printed from counselvise.com Page | 13 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 ITA No. 685/KOL/2014 (Assessee’s Appeal) 021. The ground no. 2 raised in this appeal which is similar to one as decided by us in ground no. 2 in ITA Nos. 1144/KOL/2012 for A.Y. 2008-09(supra). Accordingly, our decision would, mutatis mutandis, apply to this appeal of Revenue in ITA No. 685/KO/2014. Hence, the ground no. 2 of the assessee ‘s appeal is allowed. ITA No. 1267/KOL/2014(Revenue’s Appeal) 022. The ground no. 2 raised in this appeal which is similar to one as decided by us in ITA Nos. 1339/KOL/2012 for A.Y. 2008-09. Accordingly, our decision would, mutatis mutandis, apply to this appeal of the revenue in ITA No. 1267/KOL/. Hence, the ground no. 2 of revenue appeal is dismissed. 023. In the result, the appeals of the assessee are allowed and the appeals of the Revenue are dismissed. Order pronounced in the open court on 28.08.2025. Sd/- Sd/- (PRADIP KUMAR CHOUBEY) (RAJESH KUMAR) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Kolkata, Dated: 28.08.2025 Sudip Sarkar, Sr.PS Printed from counselvise.com Page | 14 For AYs 2008-09 & 2009-10; ITC Limited ITA No. 1339& 1144/KOL/2012 & 1267& 685/KOL/2014 Copy of the Order forwarded to: BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Kolkata 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, 5. Guard file. Printed from counselvise.com "