ITAT Chennai Allowed Section 80-IA Deduction as Consumer Tariff Held Correct Benchmark

India Cements Ltd. Vs DCIT (ITAT Chennai)

The Income Tax Appellate Tribunal (ITAT), Chennai, adjudicated an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) dated 25.08.2025 for Assessment Year 2020–21. The appeal primarily involved issues relating to deduction under Section 80-IA and disallowance under Section 14A of the Income Tax Act, 1961.

With respect to Section 80-IA, the assessee operated multiple thermal power plants generating electricity for captive consumption in its cement manufacturing units. The assessee computed the market value of electricity based on the rate at which State Electricity Boards (SEBs) supplied power to consumers. However, the Transfer Pricing Officer (TPO) determined the arm’s length price using a lower tariff based on regulatory rates applicable to power sold to electricity boards, resulting in a downward adjustment. The CIT(A) upheld this adjustment.

Before the Tribunal, the assessee relied on earlier decisions in its own case where similar issues had been decided in its favour. The Tribunal noted that the issue was covered by coordinate bench decisions for earlier assessment years, which held that for computing deduction under Section 80-IA in cases of captive consumption, the appropriate benchmark is the rate at which electricity is supplied to consumers by electricity distribution companies, and not the rate at which power is sold to SEBs. Following judicial discipline and consistent precedent, the Tribunal held that the TPO’s adjustment was not justified and directed deletion of the transfer pricing adjustment. Accordingly, the deduction under Section 80-IA was allowed.

On the issue of disallowance under Section 14A, the Assessing Officer had applied Rule 8D and computed a disallowance of ₹7,15,78,435, despite the assessee earning dividend income of ₹14.23 lakhs. The CIT(A) upheld the disallowance, considering other items such as sales tax incentive and fair valuation gain as part of exempt income.

The Tribunal observed that earlier decisions in the assessee’s own case had held that only investments yielding exempt income should be considered for computing disallowance under Rule 8D. It also noted that no contrary judicial view had been presented. Accordingly, the Tribunal directed the Assessing Officer to recompute the disallowance by considering only investments that yielded exempt income and to restrict the disallowance to 1% of the monthly average of such investments, subject to a maximum of the actual exempt income earned during the year. The assessee was directed to furnish necessary details for recomputation.

In conclusion, the Tribunal partly allowed the appeal by deleting the transfer pricing adjustment related to Section 80-IA and modifying the disallowance under Section 14A in accordance with established judicial principles. The order was pronounced on 08.04.2026.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeal)/NFAC, (hereinafter referred to as ‘Ld.CIT(A)`), Delhi, dated 25.08.2025 for the Assessment Year (hereinafter referred to as ‘AY’) 2020-21.

2. The assessee has raised the following grounds of appeal:

1. On the facts and in the circumstances of the case and in law, the order passed by the learned CIT(A), NFAC, is contrary to the facts on record and the applicable legal provisions, and therefore deserves to be set aside.

2. On the facts and in the circumstances of the case and in law, the NFAC /CIT(Appeals) has erred in confirming the disallowance of deduction claimed under Section 80-IA for an amount of Rs.49,61,60,892, being the market value of electricity generated and supplied from various units of the undertaking for captive consumption. The NFAC / CIT(Appeals) failed to appreciate that the market value for captive consumption should be determined based on the rate at which electricity is supplied to the consuming units by the State Electricity Board (SEB), and not the rate at which excess electricity is sold to third parties or SEBS.

2.1 On the facts and in the circumstances of the case and in law, the NFAC /CIT(Appeals) has further erred in confirming the downward adjustment of Rs. 126,68,65,505, by adopting ALP of the inter unit transfer of power at Rs.2,84,66,09,006/- instead of Rs.4,11,34,74,512/- as claimed in the return of income. The disallowance is therefore unjustified and liable to be deleted as decided by the Coordinate Bench of the ITAT in assessee’s own case for past years.

3. On the facts and in the circumstances of the case and in law, the NFAC/CIT(A) erred in confirming the disallowance u/s.14A of the Act of Rs.7,15,78,435/-.

3.1 On the facts and in the circumstances of the case and in law, the NFAC/CIT(A) failed to appreciate that the appellant earned dividend income of only Rs.14,23,000/- during FY 2019-20 from strategic investments, and had sufficient own funds in the form of share capital and reserves to make such investments without using borrowed funds.

3.2 On the facts and in the circumstances of the case and in law, the NFAC/CIT(A) failed to consider that the Assessing Officer did not record any dissatisfaction with the appellant’s claim regarding expenditure incurred in relation to exempt income, which is a mandatory requirement under Section 14A(2) and Rule 8D.

3.3 On the facts and in the circumstances of the case and in law, the NFAC/CIT(A) erred in not restricting the disallowance to the extent of amount of exempt income earned by the assessee.

3.4 On the facts and in the circumstances of the case and in law, the NFAC/CIT(A) further erred in not restricting the computation of disallowance under Section 14A to only those investments which actually earned exempt income earned during the year under consideration.

The Appellant craves leave to add, alter, amend or delete the aforesaid grounds of appeal from time to time as it may be advised up to the date of hearings.

3. Ground No. 1 of the appeal is general in nature which doesn’t require any adjudication and is therefore dismissed.

4. Ground No.2 raised by the assessee is against the disallowance of deduction u/s. 80IA of the Income Tax Act 1961 (hereinafter ‘the Act’). The facts concerning this issue are that, the assessee owns and operates thermal power plants Shankarnagar Tamilnadu, Banswara Rajasthan and Vishnupuram Telangana, all of which generates electricity for captive consumption by assessee’s cement units. These power generating units qualified as ‘eligible unit’ engaged in the business of generation of power under section 80-IA(4)(iv) of the Act. The transfer of power by these eligible units to the cement manufacturing units was benchmarked at the annual average of the landed cost at which power was being supplied by the State Electricity Boards to the manufacturing unit(s). The TPO in the transfer pricing assessment framed u/s 92CA(3) of the Act did not agree with the benchmarking exercise adopted by the assessee. The TPO, instead, re-worked the transfer price of power with reference to the tariff fixed by Tamil Nadu Electricity Regulatory Commission for purchase of electric power generated through Thermal Power Plants as the Arm’s Length Price in relation to the electricity transferred by the eligible power generating units of the assessee to its cement manufacturing units.

5. On appeal the Ld. CIT(A) confirmed the action of the TPO. Aggrieved, the assessee is now in appeal before us.

6. Heard both the parties. We find that this issue is no longer res integra. The Ld. AR has brought to our notice that, the impugned issue stands squarely covered by the decision of this Tribunal in the assessee’s own case for AY 2018-19 by this Tribunal in IT(TP)A No.66/Chny/2022, vide order dated 31.05.2023, wherein it was held as under:-

“7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in assessee’s own case for assessment year 2013-14 in ITA No. 737/Chny/2018, where the Tribunal under identical set of facts and also by following certain judicial precedents, including the decision of Hon’ble High Court of Bombay in the case of CIT vs Reliance Industries Ltd (Supra) held that while computing deduction u/s. 80IA of the Act for power generation companies for captive consumption, the rate charged by electricity distribution companies to its consumers should be considered instead of rate at which the power generating companies supply power to the electricity distribution companies. The relevant findings are as under:

“18.5 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in assessee’s own case for assessment year 2011-12 in ITA No.2412/Chny/2019 dated 12.12.2019, where the Tribunal under identical set of facts by following certain judicial precedents including the decision of Hon’ble Bombay High Court in the case of Reliance Industries Ltd., and the decision of Hon’ble Chhattisgarh High Court in the case of M/s. Godavari Power and Ispat Ltd., supra held that while computing deduction u/s.80IA for generation of power for captive consumption, the rate at which electricity board supply power to its consumers should be considered instead of the rate at which the power generating companies supply its power to the electricity board. The relevant findings of the Tribunal are as under:-

“31. We have considered the rival submission and perused the materials available on record.

32. A perusal of the facts in the present case clearly shows that the assessee has been captively consuming the electricity generated from its wind mill as also the Heat Waste Recovery Treatment Plant. Admittedly, the assessee is entitled to the deduction u/s.80IA of the Act in respect of the electricity generated and consumed. This is not in dispute. The dispute has risen for computing the deduction u/s.80IA of the Act. The issue admittedly is covered by the decision of the Co-ordinate Bench of this Tribunal in the case of Sri Velayudhaswamy Spinning Mills Vs Deputy Commissioner of Income Tax referred to supra and as also the decision in the case of Eveready Spinning Mills vs. Assistant Commissioner of Income Tax referred to supra. A similar view has also been taken in the case of M/s. Saranya Textiles vs. The Assistant Commissioner of Income Tax, wherein one of us is a party. This view of ours is also supported by the decision of the Hon’ble Gujarat High Court in the case of Commissioner of Income Tax vs. Gujarat Alkalies Chemicals Limited reported in 395 ITR 247(Guj.), wherein it has been held that the deduction u/s.80IA was allowable to the for generation of power for captive consumption and that the rate of power generation at which the electricity board supplied power to its consumers rather than the rate at which the power generating companies supply its power to the electricity board was to be taken as the price. Further, this view has been supported by the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income Tax vs. Reliance Industries Limited and as also the decision of the Hon’ble Chhattisgarh High Court in the case of Godavari power and Ispat Limited reported in [2014] 42 Taxman.com 551 (Chhattisgarh). As it is noticed that the learned CIT(A) has followed judicial discipline by following the decision of this Tribunal in the case of Sri Velayudhaswamy Spinning Mills Vs Deputy Commissioner of Income Tax and Eveready Spinning Mills vs. Assistant Commissioner of Income Tax referred to supra, as it is noticed this view has also been approved by the Hon’ble High Courts referred to supra, we find no error in the order of the learned CIT(A) which calls for any interference. It may be mentioned here that the deduction u/s.80IA is the deduction from the total income of the assessee the profits and gains of an eligible undertakings. The Hon’ble Gujarat High Court has categorically admitted that the deduction u/s.80IA is permissible for captive consumption and even the rate at which the deduction is to be computed. Consequently, the issue is held in favour of the assessee and against the Revenue.”

18.6 In the present case, the facts are identical with that of the facts considered by the Tribunal in earlier year. The CIT(A) after considering relevant facts and also by following the decision of the ITAT, Chennai in the case of Eveready Spinning Mills (P) Ltd., vs. ACIT, (2012) 17 taxmann.com 254 and the decision in the case of Shri Velayudhaswamy Spinning Mills (P) Ltd., vs. DCIT, (2012) 19 taxmann.com 28 has deleted additions made by the AO by holding that market value of the power captively consumed should be computed considering the rate of power to a consumer in the open market and it should not be compared with the rate of power at which power could have been sold to SEBs because this is not the rate for which a consumer could have purchased power in the open market. Therefore, we are of the considered view that there is no error in the finding recorded by the Id.CIT(A) to delete additions made by the AO towards TP adjustment on deduction claimed u/s.80IA of the Act. Hence, we reject the ground taken by the Revenue.”

8. In this view of the matter and consistent with view taken by the coordinate bench, we are of the considered view that the DRP has completely erred in sustaining the additions made by the Assessing Officer towards downward adjustment to the transactions of inter unit transfer of power from captive power generating unit to the assessee company. Thus, we direct the Assessing Officer to delete additions made towards TP adjustment in respect of deduction claimed u/s. 80IA of the Act.”

7. We find that the decision of the Tribunal in the assessee’s own case for the AY 2018-19 is squarely applicable to the present case on hand. The Ld. DR has sought to distinguish the same by citing the decision rendered by the ITAT, Hyderabad in the case of Sanghi Industries Ltd Vs DCIT (170 taxmann.com 716). We however are unable to persuade ourselves to consider the same because it is distinguishable on facts, and since, we are bound by the order passed by the coordinate Bench of this Tribunal in assessee’s own case (supra). Hence, in accordance with judicial discipline and following the decision (supra) for AY 2018-19, we set aside the order of the lower authorities, and uphold the benchmark analysis undertaken by the assessee and delete the downward transfer pricing adjustment and allow this ground raised by the assessee.

8. Ground No.3 raised by the assessee relates to the disallowance of 1,07,44,451/- made by the AO u/s 14A of the Income Tax Act 1961 (herein after the Act) in terms of Rule 8D of the Income Tax Rules 1962 (herein after the Rules). It is observed that, the assessee had derived exempt income of Rs.14.23 lacs from the investments in mutual funds which was claimed as exempt u/s 10(34) of the Act. Apart from the foregoing, the assessee had also reported sales tax incentive and fair valuation gain of investments in Schedule-EI (Exempt Income) of the ITR-6 filed for the relevant year. The AO is noted to have invoked the provisions of Section 14A and computed disallowance of Rs.7,15,78,435/-in accordance with Rule 8D. On appeal, the assessee is found to have pleaded before the Ld. CIT(A) to restrict the disallowance u/s 14A of the Act to the extent of exempt income, which according to the assessee was Rs.14.23 lacs. The Ld. CIT(A) however observed that the amount(s) reported in Schedule -EI (Exempt Income) of ITR far exceeded the quantum of disallowance made by the AO and therefore confirmed the action of the AO. Being aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before us.

9. Assailing the action of Ld. CIT(A), the Ld. AR of the assessee submitted that the Ld. CIT(A) had grossly erred in considering sales tax incentive of Rs.511.74 lacs and fair valuation gain of investments of Rs.1424.47 lacs by way of exempt income, for the purposes of Section 14A of the Act. According to the Ld. AR, the fair valuation gain of investments credited in P&L A/c was a notional gain credited on Mark-to-Market Basis, which being contingent in nature had been excluded from computation of total income. He thus claimed that this notional gain did not represent any exempt income earned by the assessee. In so far as sales tax incentive is concerned, according to the Ld. AR, it was in the nature of capital receipt not liable to tax in terms of Section 4 & 5 of the Act and that it did not bear the character of exempt income under any of the sub-clauses of Section 10 of the Act. The Ld. AR thus urged us to restrict the disallowance to the extent of exempt income earned by the assessee. Per contra, the Ld. DR supported the order of the lower authorities.

10. We have heard both the parties. It is seen that, this Tribunal in assessee’s own case for AY 2013-14 in ITA Nos.2038 & 2210/Chny/2017 & ITA No.737/Chny/2018 vide order dated 18.08.2021, after considering similar arguments of both the sides, had had held that, those investments which yielded exempt income was to be considered for the purposes of computing disallowance under Rule 8D, by observing as under:-

“6.1 Having heard both the sides and considered material on record, we find that an identical issue has been considered by the Co-ordinate Bench of ITAT, Chennai in assessee’s own case for assessment years 2007-08 in ITA Nos.1343/Mds/2010, where the Tribunal held that, only those investments which yielded exempt income shall be considered to disallow 0.5% of average value of investment, the income from which does not form part of total income. We further noted that ITAT, Delhi Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd., 58 ITR (Trib) 313 had considered an identical issue and held that only those investments which yielded exempt income for the year needs to be considered for computing disallowance of 0.5% of the average value of investment. The Id.CIT(A) after considered relevant facts has rightly directed the AO to re-compute disallowance by taking those investments which yielded exempt income for the year. Therefore, we are of the considered view that there is no error in the findings of the Id.CIT(A) and hence, we are inclined to uphold the findings of Id.CIT(A) and reject ground taken by the Revenue.”

11. We find that both the parties have not brought on record any contrary view taken in assessee’s own case in any other year(s). It is also not shown to us that, the above decision has been later on reversed or modified by the Hon’ble High Court. In absence of change in facts or law, we are therefore respectfully bound by the above decision (supra). Having regard to the amended Rule 8D, the AO is directed to re-compute and restrict the disallowance to 1% of the monthly average of exempt income yielding investments, subject to maximum disallowance of the exempt income actually earned during the relevant assessment year. Needless to say, the assessee shall provide the relevant month-wise details of investments to the AO to enable him to re-compute the disallowance. Ground No. 3 is therefore partly allowed.

12. In the result, appeal filed by the assessee is partly allowed.

Order pronounced on the 08^th day of April, 2026, in Chennai.