Validity of DVO Reference: Rejection of Books is a Prerequisite for Section 69B Addition

By | May 5, 2026
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Validity of DVO Reference: Rejection of Books is a Prerequisite for Section 69B Addition

Facts

  • The Dispute: The Assessing Officer (AO) made an addition to the assessee’s income under Section 69B representing the difference between the cost of construction reported by the assessee and the valuation estimated by the District Valuation Officer (DVO).

  • Assessee’s Contention: The assessee challenged the addition, arguing that the AO lacked the jurisdiction to refer the matter to the DVO under Section 142A without first formally rejecting the books of account.

  • Department’s Action: Upon scrutiny of the records, it was found that the AO had indeed examined the books. He recorded specific contradictions between the figures in the tax returns and the terms of the formal building contract agreement.

  • The Sequence: Only after recording these discrepancies and formally rejecting the reliability of the books did the AO seek the expert opinion of the DVO to determine the true cost of construction.

Decision

  • Final Verdict: In favour of the Revenue.

  • Ratio Decidendi: The Tribunal/Court held that while a DVO reference cannot be made arbitrarily, it is legally sustainable if the AO first identifies and records material defects in the books of account. In this case, the AO did not bypass the law; he identified objective contradictions between the assessee’s claims and their own contract agreements. Once the books were found to be unreliable, the reference to the DVO under Section 142A and the subsequent addition under Section 69B (Section 103 of the 2025 Act) were held to be justified.

Key Takeaways

  • Sequential Compliance: For tax professionals, this ruling underscores that a DVO report is not an independent piece of evidence. Its validity depends entirely on the AO first proving that the assessee’s books are untrustworthy.

  • Reconcile Third-Party Documents: Ensure that building contracts, architect certificates, and material invoices are perfectly synchronized with the book entries. Discrepancies between these documents are the primary “trigger” that allows the Department to legally reject books and call in the DVO.

  • Strategic Defense: In pending assessments where a DVO reference has been made, the first line of defense should be to check if the AO recorded a formal finding on the books of account before the reference. If the AO jumped straight to the DVO without commenting on the books, the entire addition may be void.

  • 2025 Act Application: Under Section 269 of the new Act, the power to refer to a Valuation Officer remains a potent tool. Maintaining a detailed and reconciled “Construction Ledger” is the best safeguard against such subjective valuations.

IN THE ITAT MUMBAI BENCH ‘K’
JSW Energy ltd.
v.
Assistant Commissioner of Income-tax, Central Circle -8(3)*
ANIKESH BANERJEE, Judicial Member
and Prabhash Shankar, Accountant Member
IT Appeal No. 6473 (MUM) of 2024
[Assessment year 2021-22]
MARCH  18, 2026
Rakesh Joshi, AR for the Appellant. Bhagirath Ramawat, Sr. DR for the Respondent.
ORDER
Prabhash Shankar Accountant Member.-The present appeal arising from the order dated 20.09.2024 is filed by the assessee against the order passed by the CIT (Dispute Resolution Panel-1), Mumbai-1 [hereinafter referred to as “CIT(DRP-1)”] pertaining to the order passed u/s. 144C(5) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2021-22.
2. The grounds of appeal are as under:-
1. On the facts and circumstances of the case as well as in law, the Hon’ble Disputed Resolution panel has erred in confirming the action of the Learned Assessing Officer in making an upward adjustment of Rs. 14,57,61,701/- to the Arm’s Length Price in relation to interest received on loans to its Associated Enterprises, without considering the facts and circumstances of the case.
2. On the facts and circumstances of the case as well as in law, the Hon’ble Disputed Resolution panel has erred in confirming the action of the Learned Assessing Officer in disallowing the deduction of Rs. 13,39,89,406/- claimed u/s.80IA of the Income Tax Act, 1961, without considering the facts and circumstances of the case.
3. Additional Ground:
1) On the facts and circumstances of the case as well as in law, the Hon ‘ble Disputed Resolution panel has erred in confirming the action of the Transfer Pricing Officer/Learned Assessing Officer in upholding the disallowance claimed u/s.80IA with respect to the Sale of power to AE by treating the purchase rate of SDC/SEB as ALP rate instead of considering the selling price of such distribution company as ALP.
3. The assessee requested to allow to raise the above additional ground stated to be purely legal in the nature and matter of interpretation of the law. On careful consideration of the above facts qua the records, we admit the additional ground respectfully following the case of National Thermal Power Co. Ltd. v. CIT  (SC), wherein it was held that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee, in accordance with law. If a valid claim is made for the first time as long as the relevant facts are on record in respect of that item, there is no reason to restrict the powers of the Tribunal.
4. Briefly stated facts of the case are that the assessee company is a Public Limited company involved in the business of generation of power, operation and maintenance of power plants. During the assessment proceedings, it was noticed by the AO that the assessee had entered into Specified Domestic Transactions/International Transactions with its Associated Enterprises. Hence, a reference u/s 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO).There upon, the TPO vide order u/s 92CA(3) of the Act made an upward adjustment on account of Interest received on loans to AE Rs. 14,57,61,701/- and adjustment of Rs. 51,69,47,843/- to the sales revenue of the eligible unit for the purpose of computation of deduction under Section 80-IA of the Act resulting in reduced deduction. The assessee raised objection before the Hon’ble DRP regarding the adjustment made by the TPO which confirmed the adjustment made by the TPO. In view of the order passed u/s 92CA(3), an addition of Rs. 14,57,61,701.66/-was made to the total income in accordance with the provisions of Section 92CA(3) of the Act. Also, the deduction claimed u/s 80IA of the Act was reduced by Rs. 51,69,47,843.38/- with respect to the sales revenue of the eligible unit for the purpose of computation of deduction under Section 80-IA of the Act.
5. Ground no.1 pertains to determination of Arm’s Length Price in relation to International transactions & Domestic Transactions with Associated Enterprises. As regard the order by the ld.DRP in respect of the Interest, it was observed that similar issue existed in earlier years as well and the DRP had decided the issue against the assessee. Relevant extracts of the AY 2020-21 order were as under:
“The assessee has a wholly owned subsidiary in Mauritius. For the purpose of setting up mining assets in South Africa, the assessee advanced loan to it from AY 2011-12 onwards. Various amendments were carried out in the loan agreement modifying the terms and the last amendment was carried out on 16th December, 2016. The total loan outstanding during AY 2020-21 was Rs 333.96 cr. The assessee benchmarked the transaction based on the analysis carried out in FY 2016-17 in which LIBOR plus 300 bps was arrived at.The assessee had agreed to lend at LIBOR rates, but later suo moto offered LIBOR plus 300 bps in the return. As the interest amount was not received during the year, secondary adjustment as mandated in Section 92CE was carried out. The TPO was not satisfied with the benchmarking adopted by the assessee. He carried out a search on the Bloomberg database by considering various parameters like geography of the lender and borrower, the currency of loan, date of issue of loans, tenure of the loans, security and whether interest and capital were paid repaid or not. Based on the same, the TPO arrived at the Interest rates for the various tranches issued in different financial years. As the assessee had not received the interest, the floating interests were converted into fixed interest based on the swap manager in the Bloomsberg database.
Now the applicant assessee is before this Panel questioning the benchmarking on the following counts: (i) That applying a fixed rate was against the terms of the loan agreement and the Hon’ble ITAT has ruled in favour of the applicant for AY 2012-13 (ii) Filters like country of risk and country of incorporation have not been applied consistently over the years. Some parameters like credit rating of the borrower, country of the borrower, Tenor/ maturity of the loan and other filters like -Collateral / Guarantee/Secured Unsecured and status ofthe loan were not considered by the TPO. The Panel has considered the contentions of the applicant assessee. With regard to the contention of conversion to fixed rate, the Panel is of the view that the terms of the agreement hugely differ from the actual conduct of the parties. Whereas the terms of the agreement requires that the interest payments have to be made within fixed period in each year, the conduct of the parties is contrary to the terms wherein no interest or capital has been paid till date. This has been the Department’s contention in all years starting with AY 2012-13 till AY 2018-19.
The Hon’ble ITAT’s order is for AY 2012- 13 which is the first year of the loan transaction when actual facts would not have been different from the terms of the loan or considerable time has not elapsed from the advance of the first tranche. Hence, the decision of the Hon’ble ITAT for the said year is not applicable to the later years. In uncontrolled transactions whether the assessee would have agreed to receive the same interest rate under same facts and circumstances is the moot point. The answer is definitely no. Hence TPO’s action of converting it to fixed interest rates terms is found to be in order. As regards the claim that the country of risk and country of incorporation has not been applied uniformly over the years, it is fact that the loan was availed by the AE in Mauritius even though ultimately it was used in projects for South Africa. Here the ultimate end user is not required to be considered as the loan was availed as part of the agreement between the assessee and the Mauritius entity and hence the country of borrower is rightly taken as Mauritius.
The other objections of the assessee is that credit rating of the AE has not been considered by the TPO. The assessee has arrived at the credit rating of the AE using the „Riskcalc’ application, whereas the TPO has not considered the same. In this regard, it is the observation of the Panel that even though credit rating of the borrower is an important criteria, the credit rating arrived at by the assessee is also not sacrosanct as it has not been provided by an independent agency but by using a software called ‘Riskcalc. Moreover, it is seen that assessee has taken the credit rating for the AE’s entities in South Africa, whereas it should have been for Mauritius. Hence the id TPO’s benchmarking using the Bloomberg database is found to be correct.
5.1 It was observed by ld.DRP that there was similar fact with the assessment year 2020-21. The submission of the assessee was also found to be largely the same as was made before DRP proceedings. No interference was called for in the benchmarking adopted by the ld TPO. Relying on the direction of DRP of AY 2020-21 grounds of objection was rejected.
6. Before us, the ld.AR has contended that the issue in hand is squarely covered in favour of the assessee. Oral submissions as also written submissions have been made. It is submitted that the assessee company had advanced a loan to its Associated Enterprise (“AE”) at a floating rate of interest, being LIBOR plus an appropriate spread, which was determined having regard to comparable uncontrolled transactions, with a view to benchmark the interest income from the said international transaction at arm’s length. The interest rate so charged by the assessee was consistent with prevailing market conditions and in line with the pricing adopted in similar third-partytransactions. It is further submitted that, owing to multiple modifications and revisions in the terms of the loan agreement over a period of time, no interest was actually received by the assessee company, however, the assessee suo-moto offered interest while filing its return of income. For the year under consideration, it has offered LIBOR plus 300 basis points. However, the TPO, disregarding the contractual terms and the economic substance of the transaction as structured by the parties, recharacterised the said loan as a long-term loan and, accordingly, applied a fixed rate of interest in substitution of the floating rate originally charged by the assessee.
6.1 In this regard, it is submitted that the issue under consideration now stands conclusively settled by the orders passed by the Hon’ble Income-tax Appellate Tribunal for Assessment Years 2013-14 to 2018-19. After extensive arguments advanced by both parties and detailed examination of the facts and circumstances of the case, the Hon’ble ITAT upheld the Department’s contention to the limited extent of treating the loan advanced by the assessee as a long-term loan. However, while determining the appropriate arm’s length interest rate, the Hon’ble ITAT accepted the assessee’s contention and restricted the rate of interest to 6.5%.Accordingly, the Hon’ble ITAT specifically directed the Assessing Officer to adopt a fixed interest rate of 6.5% in respect of the loan advanced by the assessee to its AE and to grant due credit for the interest income already offered to tax by the assessee in the relevant assessment years, namely AYs 2013-14 to 2018-19.
6.2 We have carefully considered the composite ITAT order in its assessee’s own case in I.T.A. No. 2364-67/Mum/2025 and I.T.A. No. 2767/Mum/2025.Relevant parts thereof are reproduced as under:
“9.1. In the present facts of the case, the conduct of the parties also clearly indicates that there was no real intention on the part of the Mauritius AE to pay any interest to the assessee. Consequently, the primary contention of the Ld. AR that the issue deserves to be decided by following the orders of this Tribunal for assessment years 2011-12 and 2012-13 (supra) therefore cannot be accepted. It is thus held that reliance on the earlier Tribunal orders for assessment years 2011-12 and 2012-13 (supra) is misplaced, as the critical aspect of the parties conduct and prolonged non- payment of interest could not have been examined in those years.
9.2. While the intra-group loans to the Mauritius AE were denominated in foreign currency and, in principle, a floating LIBOR-based rate could have been applied however, application of such a rate became untenable in the present facts. As noted, the creditworthiness of the South African AE to whom the loan was extended by the Mauritius AE was based on “Risk call” tool, and the references provided in the TP study are unverifiable. Further the spread-over of the rate is without any basis and not supported by the credit risk of the Mauritius AE being the borrower. Further, the agreed repayment schedules were repeatedly breached without any enforcement, rendering the floating rate mechanism ineffective and administratively impractical.
9.3. Upon a holistic examination of the records from assessment year 2010-11 onwards and based on the conduct of the parties, we hold that the intra-group loan advanced by the assessee to its Mauritius AE cannot be benchmarked by applying a floating LIBOR-based rate. The repeated amendments to the loan agreements, prolonged deferment of interest payments, absence of any penal consequences, and the admitted fact that no interest was actually received for more than a decade clearly demonstrate that the contractual terms were not adhered to in substance. Where the conduct of the parties demonstrates prolonged non-adherence to contractual terms relating to interest servicing, repayment schedules, and enforcement mechanisms, the real nature of the transaction must be determined on the basis of substance rather than the documented form.
9.4. We also observe that the floating rate mechanism becomes unworkable, since the agreed payment timelines were consistently breached without any enforcement. Once it is established that the floating rate mechanism cannot be applied since the parties have admittedly not adhered to the contractual terms relating to payment timelines the very foundation for applying a floating rate of interest collapses.
9.5. We have considered the chart and submissions of the Ld. AR proposing interest at 5.43% at fixed rate to treat the intra-group loan transactions at arm’s length. While the assessee contends that this rate could be applied, the cumulative conduct of the parties, the repeated amendments to the loan agreements, and prolonged deferment of interest payments indicate that the floating rate mechanism is unworkable. The last amendment of the loan agreement in Financial Year 2013-14 is relevant for determining the arm’s length interest, and the assessee’s unilateral proposal of 5.43% does not reflect the credit and default risks inherent in the transaction, nor does it adequately consider the statutory principles under section 92CB and Rules 10TA-10TG. Accordingly, the assessee’s proposal of 5.43% is rejected.
9.6. In such circumstances, adopting LIBOR-based benchmark with an appropriate spread provides a neutral, market-aligned reference rate that reflects the cost of funds in international financial markets. This approach ensures that the interest rate applied to the intra-group loans is consistent with arm’s length principles, even where the AE’s credit risk could not be independently verified and the floating rate mechanism could not be reliably enforced.
9.7. Be that as it may, from the manner in which both the assessee and the Revenue have determined the arm’s length price of the loan transaction with the Mauritius AE, it is evident that several obligations mandated under Chapter X of the Act have not been duly followed. It is also an admitted fact that the assessee did not levy any penal interest for the continued nonpayment of interest by the Mauritius AE for more than a decade. We, therefore, concur with the view adopted by the Coordinate Bench of this Tribunal for assessment year 2020-21 (supra), that a default fixed interest rate, and not a floating rate.
9.8. At this stage, we deem it appropriate to clarify that no useful purpose would be served by remanding the issue to the Ld.TPO/Ld.AO for fresh determination. In the present facts, remand would merely result in a mechanical re-examination of the same material already available on record, without any likelihood of altering the substantive outcome, and would only prolong the litigation without advancing the cause of justice. We therefore consider it appropriate to finally determine the arm’s length interest rate ourselves, in exercise of our appellate jurisdiction, by drawing guidance from the Safe Harbour Rules, rather than restoring the matter for reconsideration.
9.9. In such circumstances, it is appropriate to adopt a fixed default rate of interest by drawing guidance from the OECD Transfer Pricing Guidelines, 2017, and the Safe Harbour Rules framed under section 92CB read with Rules 10TA to 10TG of the Income-tax Rules, 1962. Even though the assessee has not formally exercised the safe harbour option under Rule 10TG, the principles embodied in section 92CB read with Rules 10TA-10TG may be relied upon as guiding benchmarks for determining a reasonable arm’s length outcome. Rule 10TD prescribes specific safe harbour conditions for intragroup loans, including:
(i) that the interest rate declared must not be lower than a prescribed reference rate plus spread determined with reference to the credit rating of the associated enterprise;
(ii) the assessee must have made a formal safe harbour opt-in; and
(iii) the use of reference rates, replacing LIBOR, with spreads varying according to the AE’s credit rating and loan size.
These conditions ensure that safe harbour interest rates reflect economically relevant benchmarks, providing certainty and reducing transfer pricing disputes where the criteria are satisfied.
9.10. In view of the guiding benchmarks discussed hereinabove, and having regard to the fact that the creditworthiness of the borrower AE remains indeterminate in the absence of any reliable or independent credit rating, coupled with the undisputed position that the AE has enjoyed the use of substantial funds for an extended period without incurring any interest servicing costs, the adoption of a conservative fixed interest rate emerges as the most fair, reasonable, and arm’s length determination. Taking into consideration the totality of the undisputed facts, the prolonged and consistent conduct of the parties, and the statutory framework under Rule 10TD read with section 92CB, we determine the arm’s length interest rate at LIBOR plus 600 basis points as reference point. In our view 6.5% fixed rate will be reasonable approximation of an arm’s length outcome by drawing guidance from the Safe Harbour principles, considering the facts of the present case.
9.11. This determination is based on the undisputed factual matrix and the consistent conduct of the parties as emerging from the materials available on record for the relevant period. It is clarified that, so long as these material facts and contractual arrangements remain substantially unchanged and no fresh evidence is brought on record, the benchmarking of the interest rate on the said intra-group loan shall ordinarily not warrant reconsideration on the same grounds in subsequent assessment years under consideration.
9.12. Accordingly, the Ld.AO is directed to adopt fixed interest rate of 6.5% on the loan advanced by the assessee to its Mauritius AE for assessment year 2013-14 and to grant due credit for the interest already offered to tax by the assessee for the year under consideration. In respect of other years under consideration, considering the fact that there has been no change in the facts, the fixed interest rate at 6.5% is reasonable. Accordingly, Grounds 1-4 raised by revenue stands partly allowed.”
6.3 In view of the above, and in the absence of any deviation in the material facts and circumstances of the case during the impugned assessment year, including the nature of the transaction and the terms and conditions governing the loan agreement during the year under consideration, it is submitted that the interest rate so determined and upheld by the Hon’ble ITAT continues to hold good and ought to be followed consistently for the current assessment year as well. It is a settled principle of law that where the facts remain unchanged, a view taken in earlier years by a higher appellate authority is required to be followed in subsequent years in the interest of judicial consistency. Accordingly, it was prayed that appropriate directions may be issued to adopt the fixed interest rate of 6.5% for benchmarking the impugned international transaction and to allow due credit for the interest income suo motu offered to tax by the appellant during the year under consideration.
7. The ld.DR placed reliance on the orders of the authorities below. He did not controvert the contentions of the ld.AR and has also not brought on record any distinguishing feature qua preceding assessment years and the directions of the ITAT.
8. We have carefully considered all the relevant aspects of the case and have also gone through the decision of ITAT in assessee’s own case in earlier assessment years(supra) whereby directions have been given to adopt the fixed interest rate of 6.5% for benchmarking the impugned international transaction and to allow due credit for the interest income suo motu offered to tax by the appellant during the year under consideration. Accordingly, the order passed by the hon’ble DRP is set aside and the AO is directed to comply with the directions of ITAT in the order referred above which are squarely applicable to the instant year as well. Thus, the ground of appeal in this regard is allowed.
9. Ground no.2 pertains to disallowance of deduction claimed u/s 80-IA of the Act in respect of its Power plants.
10. The only issue in the ground pertains to the deduction of Rs 13.39 cr. u/s 80IA of the Act in respect of its four ‘Eligible’ Power Plant units. The AO noted that the assessee had claimed deduction for Unit 1 & Unit 2 put together and Unit 3 & Unit 4 put together in its returns. Unit 1 and 2 of SBU 3 had incurred loss from the business of power generation and no deduction u/s 801A was claimed by the assessee. The company had claimed deduction under Chapter VIA of the act under section 80-IA of the Act of Rs. 13,39,89,406/- after setting of loss from Unit-3 of Rs. 37,94,98,424/- against the profit of Rs 51,34,87,830/-earned by Unit 4. In this regard, the AO held that assessee company had earned profits from Units-4 i.e. Rs. 51,34,87,830/- and incurred loss from Unit-1 of Rs. 118,33,33,002/-, from Unit-2 of Rs. 10,03,83,587/-, from Unit-3 of Rs. 37,94,98,424/-. On totalling of Profit & Loss from eligible SBU (Units), the assessee had shown Income eligible for claim of deduction u/s 80-1A of Rs. 13,39,89,406/-(i.e. after setting of loss fromUnit-3 of Rs. 37,94,98,424) and accordingly claimed deduction of Rs. 13,39,89,406/- on account of profit from Unit-4 (net off with Unit 3) without taking into consideration the loss incurred by Unit-1 and Unit-2. Thus, the AO adjusted the losses from other units against the balance amount of Rs 13,39,89,406/- claimed as deduction under Section 80-IA of the Act and disallowed the claim of assessee company.Action of the AO was upheld by the DRP.
11. Before us, the ld.AR has fairly admitted that the Revenue has relied upon the assessee’s own case for AY 2020-21 wherein the appeal of the assessee company was dismissed and it was held that unit wise calculation was not allowed and losses of eligible units have to set off against profits of other eligible unit. In stating so, the ITAT has relied upon the decision of Apex Court in the case of CIT v. Reliance Energy Ltd. (SC). However, the Ld.AR of the assessee contested that the application of the legal case law is itself bad in law as the said decision of the Supreme Court talks about the methodology of calculation of deduction u/s 80-IA and nowhere speaks about the inter-unit losses to be set off against profit of eligible unit. It is argued that application of the said decision was wholly misconceived and misplaced, as the ratio laid down therein operated in an entirely different legal and factual context and does not govern the issue arising in the present case, namely, inter-unit set-off of losses while computing deduction under section 80-IA of the Act. It is contended that the said decision of the Hon’ble Supreme Court was confined strictly to the methodology for computation of deduction under section 80-IA(1) and the interpretational scope of section 80-IA(5). The said judgment nowhere laid down any proposition of law mandating the adjustment or set-off of losses of non-eligible units or other eligible units against the profits of the eligible unit for the purposes of determining the deduction under section 80-IA.It is submitted that the Hon’ble Supreme Court unequivocally held that section 80-IA(5) had a restricted and specific role, i.e., determination of the quantum of deduction under section 80-IA(1), and cannot be expanded beyond that limited purpose. Therefore, the application of the said Supreme Court judgment to the present facts is legally unsustainable, as it neither lays down nor even remotely addresses the proposition that inter-unit losses are required to be set off against the profits of the eligible unit while computing deduction under section 80-IA. The factual and legal matrix of the present case is thus clearly distinguishable from that considered by the Hon’ble Supreme Court.
11.1 In view of the above, it is submitted that the finding rendered by the Hon’ble ITAT for Assessment Year 2020-21, though arising from similar facts, is based on an incorrect application of law by relying on a judicial precedent which is not applicable to the issue under consideration. Further reliance was also placed on the decision of Punit Construction Co. v. Jt. CIT (Mumbai) wherein after considering multiple decisions including special bench ones, the Mumbai ITAT held concluded that in terms of provisions of sub-section (5) of section 80-IA, deduction has to be given unit-wise without considering profit or loss of other eligible units. Copy of the order was submitted at the time of hearing. Reliance was also placed on the decision of Hon’ble Allahabad HC in the case of CIT v. Modi Xerox Ltd.(No.2) (Allahabad) (Allahabad)). Thus, it was submitted that the assessee company was eligible for deduction u/s 80-IA as the loss from other eligible units could not be set-off and that the deduction has to be calculated unit-wise.
12. The ld.DR has contended that the issue has already been decided against the assessee by the ITAT in its appeal for AY 2020-21 in Asstt. CIT v. JSW Energy Ltd. [ITA Nos. 3713 and 3714 (Mum) of 2024, dated 26-3-2025] which inter alai placed reliance on the decision of hon’ble Supreme Court in the case of Reliance Energy Ltd. in Civil Appeal no. 1328 of 2021.It is further submitted that the MA filed by the assessee before the Bench based on jurisdictional High Court in the case of CIT v. Maharashtra Hybrid Seeds Co. Ltd.(Bombay) was also dismissed. Relevant parts of the order are extracted as below:
“15. The ground No. 6 of the appeal relates to deduction of Rs.69,30,25,027/-claimed u/s 80IA of the Act disallowed by the lower authorities. The facts in brief qua the issue in dispute are that assessee claimed deduction of Rs.69,30,25,027/-Rs.69,30,25,027/ u/s 80IA of the Act. The Assessing Officer further observed that assessee was having four units i.e. Unit No. 1, Unit No. 2, Unit No. 3 and Unit No. 4 eligible for claiming deduction u/s 80IA of the Act. The Assessing Officer noticed from the details of computation of deduction that earned income from three units i.e. income of Rs.32,22,78,846/-,Rs.92,11,43,970/- from Unit No. 1. The aggregate profit from all eligible SBU Units of Rs.9,41,59,903/- shown from the Rs.9,41,59,903/ has been profit and loss account and therefore, according to the Assessing Officer only said profit was eligible for deduction u/s 80IA of the Act as against the deduction of Rs.69,30,25,027/-claimed for deduction in respect from the profit from Unit No. 3 and Unit No. 4 Unit without taking into consideration loss incurred from Unit No. 1. Thus, according to the Assessing Officer, the assessee has not set off losses incurred from Unit No. 1 amounting to Rs.92,11,43,970/-.
In response to the show cause notice, the assessee relied on various decisions which have been cited in the submission of assessee reproduced by the Assessing Officer. After considering the submission, the claim of the assessee was rejected mainly on the ground round that according to the Assessing Officer deduction u/s 80IA is in respect of eligible business, the Ld. Assessing Officer referred to 80AB of the Act and according to which deduction has to be allowed with reference to income included in the gross total income includes According to the Assessing Officer ,the net income after setting off of losses. Therefore, assessee is eligible for deduction in respect of aggregate profit from all the units after
The Assessing Officer relied on the decision of the Hon’ble High Court Punjab & Haryana High Court in the case of Bajaj Motors Pvt. Ltd. (supra) and decision of the Hon’ble Supreme Court in the case of Synco Industries Ltd. (supra). The Assessing Officer also relied on the other decisions also cited in the impugned order. The Ld. DRP also upheld the finding of the Assessing Officer and rejected the objection of the assessee.
16. We have heard rival submissions of the parties and perused the relevant materials on record. Before us, the Ld. counsel for the assessee has relied on the decision which was cited before the lower authorities. The core issue in dispute is whether the deduction is to be computed in respect of profit of each undertaking engaged in Business or deduction has to be computed on aggregate eligible business profit of all the units engaged in eligible business. Fore ready reference, the relevant provisions of section 80IA of the Act are extracted as under:
Deductions in respect of profits and gains from “Deductions Industrial undertakings or enterprises engaged in industrial infrastructure development, etc.
[(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section sub section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.] sub section (1) may, at the option (2) The deduction specified in sub-section of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park 47[or develops 48[***] a special economic zone referred to in clause (iii) section (4)] or generates power or commences of sub-section transmission or distribution of power [or undertakes substantial existing transmission or renovation and modernisation of the existing distribution lines [***] :
[Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or section (4), the clause (c) of the Explanation to clause (i) of sub-section sub section shall have effect as if for the provisions of this sub-section words “fifteen years”, the words “twenty years” had been substituted.] substituted.]”
(3)……..
(4)……..
(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub section (1) apply shall, for the sub-section purposes of determining the quantum of deduction under that section for the assessment year immediately succeeding sub-section the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year year and to every are relevant to the initial assessment year subsequent assessment year up to and including the assessment year for which the determination is to be made.
16.1 The section 80IA(5) clearly specify that for the purpose of determining quantum of deduction , the computation has to be made as if the eligible business is the only source of income. In the case of the assessee, all the three units are engaged in the ‘eligible, business’ of generating electricity, therefore we are of the opinion that for the purpose of computation of deduction u/s 80IA of the Act in the case of assessee, the aggregate profit of the eligible business i.e. all the three units have to be taken. Certainly, loss set off against the aggregate from non eligible business can’t be set-off profit of eligible business for computing deduction u/s 80IA of the Act. The purpose of allowing deduction is for promotion of the manufacturing or generation of the particular products and promotion of business of those products and not promotion of an undertaking, therefore, aggregate profit of different undertaking of the assessee is eligible for deduction u/s 80IA should only be considered for the purpose of deduction. In support , we also rely on the decision of Hon’ble Supreme Court in the case of Tax-II v. M/S Reliance Energy Ltd Commissioner Of Income Tax (Formerly Bses Ltd) on 28 April, 2021 in Civil Appeal No. 1328 of 2021.
13. The other contention of the Revenue is that sub-section 80-IA refers to computation of quantum of deduction being limited from fro ‘eligible business’ by taking it as the only source of income. It is sub section (5) makes it clear that contended that the language of sub-section sub section (1) is only with respect to the deduction contemplated in sub-section income from ‘eligible business’ which indicates that there is a cap in sub-sub section (1) that the deduction cannot exceed the ‘business income’. On the other hand, it is the case of the Assessee that sub section (5) pertains only to determination of the quantum of deduction by treating the ‘eligible business’ as the only source of income. It was submitted by Mr. Vohra, learned Senior Counsel, that the final computation of deduction under Section 80-IA for the assessment year 200203 as accepted by the Assessing Officer, was arrived at by taking into account the profits from the ‘eligible business’ as the ‘only source of income’. He submitted that, however, sub section (5) is a step antecedent to the treatment to be given to the deduction under sub- section (1) and is not concerned with the extent to which the computed deduction be allowed. To explain the interplay between sub section (5) and sub-section will be useful to refer to the facts of this Appeal. The amount of deduction from the ‘eligible business’ computed under Section 80-IA for the assessment year 2002-03 is Rs. 492,78,60,973 /-. There is no dispute that the said amount represents income from the ‘eligible business’ under Section 80-IA and is the only source of income for the purposes of computing deduction under Section 80-IA. The question that arises further with reference to allowing the deduction so computed to arrive at the ‘total income’ of the Assessee cannot be determined by resorting to interpretation of sub-sub section (5).
14. It will be useful to refer to the judgment of this Court relied upon by the Revenue as well as the Assessee. In Synco Industries (supra), this Court was concerned with Section 80-I of the Act. Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows:
” 80-I(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going ocean vessels sub section (1) apply or other powered craft to which the provisions of sub-section app shall, for the purposes of determining the quantum of deduction under sub- section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the ocean going vessels or other powered hotel or the business of repairs to ocean-going craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”
It was held in Synco Industries (supra) that for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-sub section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee. The Assessee also relied on the judgment of this Court in Canara Workshops (P) Ltd., Kodialball, Mangalore (supra) to emphasize the purpose of sub-section sub (5) of Section 80–IA. In this case, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form production of any one or more of power or of construction, manufacture or production of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. This Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit under Section 80- E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.
15. In the case before us, there is no discussion about Section 80IA(5) by the Appellate Authority, nor the Tribunal and the High Court. However, we have considered the submissions on behalf of the Revenue as it has a bearing on the interpretation of sub-section section (5) of Section IA of the Act. We hold that the scope of sub-section 80- IA of the Act is limited to determination of quantum of deduction under sub-section sub (1) of Section 80-IA of the Act by treating ‘eligible business’ as the ‘only source of income’.’ section (5) cannot be pressed into service for reading a limitation of Sub-section sub section (1) only to ‘business income’. An attempt the deduction under sub-section was made by the learned Senior Counsel for the Revenue to rely on the phrase ‘derived . from’ in Section 80-IA (1) of the Act in respect of his submission that the intention of the legislature was to give the narrowest possible construction to deduction admissible under this sub sub-section. It is not necessary for us to deal with this submission in view of the findings recorded above. For the aforementioned reasons, the Appeal is dismissed qua the issue of the extent of deduction under Section 80-IA of the Act.”
13. On careful consideration of above facts, it is evident that the issue has already been adjudicated against the assessee. Respectfully following the above ITAT order, we find not infirmity in the order passed which is, therefore, upheld and the ground of appeal of the assessee is dismissed.
14. In so far as the additional ground is concerned, it is submitted that during the year under consideration, the assessee company has sold power to JSWSL, ARCL, JSWSCL, JSWCL and ACCIL for their own captive consumption as per the power purchase agreement (PPA) signed between them. The power is sold by Unit 2, Unit 3, and Unit 4 plant of SBU 3 situated in Ratnagiri, Maharashtra. The rate per unit for power supplied had been determined by following the mechanism laid down by the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019. The CERC Tariff Regulation has been issued for the purpose of determining the tariff rate of a generating unit that generates and transfers power for commercial purposes. The CERC Tariff Regulation provides for computation of two different charges for supply of power, one being the fixed ‘capacity charges’ i.e. costs for recovery of fixed expenditures incurred by the generator with respect to operating and maintaining the power generating facility, and other being the ‘energy charges’ for recovery of fuel costs i.e. variable cost, for long term PPAs. During the year under consideration, the assessee company was responsible for procuring and sourcing the fuel, generating and transmitting of power as per the terms of the agreement and accordingly the assessee company has charged its AE’s both capacity charges and energy charges as per the guidelines provided by CERC Tariff Regulation with respect to sale of power which came in the range of Rs. 4.38 to 5.06 per unit. Alternatively, to corroborate the above and justify that the price charged was not more than the arm’s length price, it was mentioned that if the related parties were to acquire power from third parties, then they would have acquired from state electricity board of Maharashtra. The rate charged by State electricity Board of Maharashtra was Rs 6.63 to 8.53 per unit, thereby indicating that the tariff rate applied by the Company had not resulted in more than ordinary profits and should be considered at arm’s length.
14 .1 It is pleaded that the TPO failed to appreciate the fact that the rate charged was as per the guidelines provided by CERC Tariff Regulation. In fact, the TPO failed to provide any finding nor rejected the said benchmarking methodology adopted by the assessee company. On the contrary, the TPO challenged the alternate benchmarking after accepting the primary benchmarking by stating that rate at which power is purchased by the consuming unit from the DC cannot be compared to the rate at which power was sold by the CPP to the consuming unit and that that the comparison of the price paid to an eligible unit for power purchase should be benchmarked with power generators and not with that of a distributor. Thus, in stating so the TPO treated the average power purchased rate of Rs. 4.24 per unit as Arms Length rate and made an adjustment of Rs 51,69,47,843/- to amount of deduction claimed by the appellant u/s 80-IA of the Act.
14 .2 In this regard, Ld.AR during the course of hearing submitted that the said issued is now covered in favour of the assessee company by its own case for AY 2013-14 to 2018-19. In addition to the above, it is also covered by the decision of Mumbai Third Member Bench in the case of Aditya Birla Nuvo Ltd. (563/Mum/2O18), wherein the Hon’ble Vice President, being the Third Member observed that the ALP rate had to be considered as the selling rate of Distribution Companies. Relevant parts of the order are reproduced as below:
“44. It is noteworthy, in case of Star Paper Mills Limited v. DCIT(supra)identical view expressed by the Bench has been upheld by the Hon”ble Calcutta High Court. At this stage, we must observe , in case of Jindal Steel & Power Ltd. (supra), the Hon’ble Supreme Court while was on the issue of what should be the market value u/s. 8oIA(8) of the Act prior to its amendment in 2013, had observed that in case the assessee had not obtained power from the captive power plant, it would have purchased power from the State Electricity Board and in such a scenario, it would have purchased power at the same rate at which the State Electricity Board supplies power to other consumers, hence such rate can be considered as the market value. The learned DR has forcefully submitted that the decision of Hon’ble Supreme Court having been rendered prior to the amendment to section 8oIA(8) of the Act and having not been rendered in the context of Explanation u/s.8oA(6) of the Act, will not apply. The learned DR has further submitted that the decision of Hon’ble Delhi High Court in case of DCM Shriram Ltd. (supra) and other decisions having not taken note of the overriding effect of section 8oA(6) of the Act, are per incuriam and are sub-silentio on the issue of applicability of section 8oIA(6) of the Act and hence, will not constitute binding precedents. In my considered opinion, such contention of learned DR is unacceptable for the simple reason that ITAT being at a lower level in the judicial hierarchy than High Courts, does not have the power or competence to question the correctness of a judgment rendered by Hon’ble High Court or declare it as per incuriam. The correctness or otherwise of a judgment of Hon’ble High Court can be tested by an aggrieved party before the highest court and not before the Tribunal.
45. At this stage, I must observe, learned DR has heavily relied upon a decision of ITAT, Hyderabad Bench in case of Sanghi Industries Ltd. v. DCIT (supra) to contend that the rate at which the generating company supplies power to the distribution licensee will be the ALP. Upon carefully going through the aforesaid decision of the coordinate Bench I found it to be factually distinguishable. The Bench has recorded a finding of fact that the CPP had sold surplus electricity to 14 individuals at an average rate of Rs. 2.97/- per unit. Whereas, in the TP study it has adopted the rate of Rs. 7.85/-per unit. In contrast, in the present case, CPP has sold power only to Rayon Plant for captive consumption at Rs. 6.62/- per unit and to no other party at any other rate. As against the aforesaid decision cited by learned DR, there are decisions of Hon”ble Delhi High Court in case of PCIT v. DCM Shriram Ltd.(supra) and that of Hon”ble Calcutta High Court in case of PCIT v. Rungta Mines Ltd. as well as plethora of other decisions of ITAT favourable to assessee, which are directly on the issue and have been rendered after considering all the relevant provisions of the Act, including, sections 8oA(6), 8oIA(8) with amended explanation, 92F(ii), Rule 10B etc. Therefore, these decisions carrying precedent value cannot be lightly brushed aside by branding them as per incuriam or having been rendered sub silentio of certain relevant provisions, merely because they are against the revenue.
46. Thus, upon considering the overall facts and circumstances of the case in the light of the judicial precedents cited before me, I am of the considered opinion that the price at which the assessee purchased power from the distribution licensee, GUVNL can be applied as a valid CUP for determining the ALP of sale/supply of power by the CPP to the Rayon Plant. In other words, the price of Rs.6.62 per unit charged by CPP to the Rayon Plant can be considered as ALP of the power supplied by the CPP to Rayon Plant. Thus, I agree with the view expressed by learned Judicial Member that the deduction claimed by the assessee u/s. 80IA of the Act should be allowed without making any downward adjustment.”
15. Thus, in view of the same, it is submitted by the ld.AR that the addition made by the AO needs to be deleted and the additional ground raised by the assessee company needs to be allowed. He submitted that the decision of Third Member could not be applied to the facts of the case. On the other hand, he placed reliance on the decision of the coordinate Bench of ITAT, Hyderabad in the case of Sanghi Industries Ltd. v. Dy. CIT (Hyderabad – Trib.)/ITA (TP) 104/Hyd/2022.
16. We have carefully considered all relevant facts of the case. The issue in hand is squarely covered by the decision of Third Member as also the ITAT in assessee’s own case in its appeals for AYs 2013-14 to 2018-19.Accordingly,the ground of appeal is allowed and the AO is directed to allow the claim of the assessee.
17. In the result, the appeal of the assessee is partly allowed.