Section 80-IA Deduction Requires No General Expense Allocation,

Section 80-IA Deduction Requires No General Expense Allocation, Warranty Supplies and TDS-Compliant Royalties Are Allowable

Issue

Section 80-IA Deduction: Whether general administrative and other business expenses can be allocated to curtail Section 80-IA deductions when eligible windmill units maintain separate books and accounts reflecting only directly relatable expenses.
Warranty Expenditure: Whether free-of-cost supplies and warranty obligations connected to machinery sales can be disallowed or treated as unexplained turnover variations.
Royalty Payment Disallowance: Whether royalty payments made to a non-resident Italian company can be disallowed under Section 40(a)(i) on the premise of TDS default when tax was duly deducted and deposited under Section 195 along with Forms 15CA/15CB filing.

Facts

Windmill Segment & Section 80-IA (Assessment Year 2020-21): The assessee manufactured plastic printing and lamination machines and operated two windmills, claiming a Section 80-IA deduction. Separate profit-loss accounts and balance sheets were maintained for each windmill unit, with profits computed solely after considering directly relatable expenses. However, the Assessing Officer curtailed the deduction by allocating general administrative and other business expenses to the eligible windmill business.
Warranty Supplies & Turnover Variation (Assessment Year 2020-21): During scrutiny of a revised return, a variance appeared between turnover reported in GST filings and audited accounts. The assessee explained this arose from free-of-cost supplies made under contractual warranty (reflected in GSTR-9 without accruing consideration), with corresponding year-end provisions subsequently reversed. The Assessing Officer nevertheless made additions on account of this turnover variation.
Royalty Payment & TDS Compliance (Assessment Year 2020-21): The assessee entered into a royalty arrangement with an Italian company for a Rotogravure Press model, making royalty payments of approximately Rs. 23.21 lakhs. Tax was deducted at source under Section 195, Forms 15CA/15CB were furnished, tax was deposited, and the details were reflected in quarterly TDS returns. The Assessing Officer nonetheless disallowed the royalty payment under Section 40(a)(i) alleging a TDS default.

Decision

Windmill Deductions Sustained: Since the assessee maintained separate books and accounts for the eligible windmill units, the contention that expenses relating to other businesses were excluded was fully valid. The impugned expense allocation and addition were deleted in favor of the assessee.
Warranty Expenses Allowed: Warranty obligations form an integral part of machinery sales. Expenditures toward spare parts, repairs, and warranty services cannot be isolated from underlying sales transactions, and being incurred in the ordinary course of business, the disallowance was deleted in favor of the assessee.
Royalty Disallowance Deleted: Because tax was duly deducted and deposited under Section 195 along with proper statutory filings, disallowance of royalty payments under Section 40(a)(i) cannot be sustained merely because the Assessing Officer incorrectly invoked Section 194J. The addition was deleted in favor of the assessee.

Key Takeways

Segment Accounting Protection: Maintaining independent books and accounts for eligible infrastructure undertakings under Section 80-IA shields profits from arbitrary allocation of general corporate overheads by tax authorities.
Integrity of Warranty Obligations: Free-of-cost replacement parts and services provided under contractual warranties are inherent business outgoings tied directly to sales turnover, rendering them fully allowable expenses.
TDS Compliance Validity: Once tax is correctly withheld and remitted under Section 195 with accompanying compliance forms (15CA/15CB), disallowances under Section 40(a)(i) cannot arbitrarily be enforced based on mismatched section references.

IN THE ITAT RAJKOT BENCH

Pelican Rotoflex (P.) Ltd.

CIT(A), DCIT/ACIT

SONJOY SARMA, Judicial Member
and Dr. Arjun Lal Saini, Accountant Member

IT Appeal No. 908 (RJT) of 2026
[Assessment year 2020-21]

OCTOBER 21, 2026

Mehul Ranpura and M. F. Sadikot, Ld. ARs for the Appellant. Ganesh Iyer, Ld. Sr. DR for the Respondent.

ORDER

Sonjoy Sarma, Judicial Member.- Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2020-21, is directed against the order under section 250 of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] passed by the National Faceless Appeal Centre [hereinafter referred to as ‘NFAC’], dated 05.05.2026, which in turn arises out of an order passed by assessing officer u/s. 143(3) of the Act, dated 29.09.2022.

2. Brief facts of the case are that the assessee, is engaged in the business of manufacturing plastic printing and lamination machines. For A.Y. 2020-21, the assessee filed its revised return of income on 20.01.2021 declaring total income of Rs. 7,02,28,860/-.The case was selected for scrutiny and notice under section 142(1) of the Income-tax Act, 1961 was issued on 10.12.2021. Subsequently, a notice dated 18.09.2022 was issued seeking clarification and explanation on various issues. The assessee furnished its submissions along with supporting details on 21.09.2022.The Assessing Officer, however, completed the assessment under section 143(3) read with section 144B of the Act and made various additions/disallowances, resulting in an aggregate addition of Rs. 81,13,199/- and consequential demand of Rs. 33,09,210/-. The principal issues on which addition were made by the Assessing Officer were as under:

Deduction under section 80-IA: The Assessing Officer questioned the relatively large deduction claimed under section 80-IA of the Act. The assessee explained that it had two windmills of 250 KW and 750 KW capacity generating electricity and that the profit of the eligible windmill business was computed after considering only the expenditure directly relatable to such eligible business, namely depreciation, interest on secured loans and energy-generation expenses. It was submitted that expenses such as building repairs, housekeeping, insurance, legal and professional charges, audit fees, travelling and miscellaneous expenses related to the assessee’s other business and were therefore not allocated against the eligible business.

Disallowance under section 40(a)(ia): The assessee had entered into a royalty agreement dated 29.12.2016 with Cerutti Packaging Equipment, Italy for purchase of a Rotogravure Press Model R-982. The assessee submitted that the royalty/payment of Rs. 23,20,632/- was duly subjected to tax deduction at source under section 195 of the Actand that the requisite Forms 15CA and 15CB had also been furnished. It was further submitted that the corresponding TDS had been deposited through State Bank of India and reported in the quarterly TDS return. According to the assessee, therefore, no disallowance under section 40(a)(ia) was warranted.

Variation in turnover: The assessee explained that an amount of Rs. 52,37,441/-represented free-of-cost supplies made under warranty. Since no consideration was received against such supplies, no income was recognised in respect thereof. However, the value of such supplies was required to be reflected in the GST records and was consequently included in the turnover reported in GSTR-9. It was also submitted that the corresponding provision created at year-end was subsequently reversed.

GST expenditure: The assessee claimed GST expenditure of Rs. 7,01,827/- and submitted that the same was compensatory/revenue in nature, comprising reversal of input tax credit under section 17(5) of the Act, reversal of common credit and GST liability under reverse charge mechanism. It was therefore contended that the expenditure was not in the nature of a capital, personal or penal expenditure and was allowable under the Act. The assessee contended that the aforesaid explanations and supporting documents had not been properly considered by the Assessing Officer while completing the assessment.

Accordingly, the assessee preferred an appeal before the CIT(A) under section 246A of the Act challenging the additions and disallowances made in the assessment order. Where appeal of the assessee was partly allowed by allowing the claim of assessee on the issue of GST expenditure and other issues were sustained and relating to the issue of TDS remit back to the file of AO for re-examination.

3. Still aggrieved by the order of the Ld. CIT(A) assessee is in appeal before this tribunal Ground No. 1 relating to disallowance of deduction under section 80-IA of the Act. The Ld. AR submitted that the assessee had two windmills, one having a capacity of 750 KW and the other having a capacity of 250 KW. It was contended that separate books of account, including profit and loss accounts and balance sheets, were maintained in respect of the two windmills. The expenses attributable to the respective windmill businesses were separately accounted for, and the profits derived therefrom were duly considered while computing the deduction claimed under section 80-IA of the Act.

4. The Ld. AR further submitted that no expenditure relating to the assessee’s other business had been debited to the accounts of the eligible windmill business. Accordingly, there was no justification for making the impugned addition of Rs.14,77,741/-. It was also pointed out that no similar disallowance had been made in the preceding or succeeding assessment years.

5. On the other hand, the Ld. DR supported the orders of the authorities below.

6. The Ld. AR submitted written submission on this issue as under:

“ERRONEOUS ALLOCATION OF COMMON EXPENSES TO ELIGIBLE SECTION 80IA BUSINESS (Rs. 14,77,741/-)

1. Factual Matrix & Nature of Accounts: –

The Appellant operates two power generation units (Windmills of 250KW and 750KW capacity) entitled to deduction under Section 801A. While composite audited financial statements are filed for the company as a single legal entity, the Appellant maintains detailed segmental memorandum books / internal project accounts for the windmill units.

All direct and actual expenditures attributable to the generation of electricity-such as depreciation, interest on secured loans taken for windmill assets, operation & energy generation charges, and insurance-are accurately identified and debited in the segmental computation of eligible profits.

2. Arbitrary Pro-Rata Allocation by Lower Authorities

• The learned AO identified seven specific administrative expenditure heads debited in the main Profit & Loss Account totaling Rs. 2,65,20,096/- (comprising building repairs, factory housekeeping, legal & professional fees, auditor remuneration, travel, and miscellaneous expenses).

• The AO applied an ad-hoc formula of 5.57% (Eligible Income / Gross Total Income) to attribute Rs. 14,77,741/- to the windmill units, without establishing any direct nexus.

• The learned CIT(A) confirmed the disallowance on the ground of non-furnishing of documentary evidence.

Gross Total Income:	Rs. 7,43,78,655/-
Claimed Deduction u/s 80IA:	Rs. 41,39,791/
Proportionate Ratio (80IA / GTI):	5.57%
Disallowance imposed by AO:	Rs. 14,77,741/-

3. Legal Arguments & Precedents

Absence of Operational Nexus: The windmill generation is automated and remotely situated. General factory housekeeping, factory building repairs, and corporate legalfees incurred for the machinery manufacturing business bear zero operational connection to wind power generation.

Impermissibility of Ad-Hoc Pro-Rata Allocation: Where direct expenses are already captured and standalone computations identify all related costs, the Revenue cannot arbitrarily apportion general head office/manufacturing overheads without proving that such expenditure was incurredfor the eligible undertaking.

1. ITAT Ahmedabad & Gujarat High Court Jurisprudence

CIT v. Torrent Power Ltd. / Torrent Group (Gujarat High Court / ITAT Ahmedabad):

• Citation/Reference 363 ITR 474/272 CTR 270 (Gujarat) / ITA No. 1577/Ahd/2015 and related batch appeals.

• Ratio: Where common funds/records exist and the direct operating costs ofpower-generating/infrastructure undertakings are completely accounted for, arbitrary loadings of corporate administrative costs or interest disallowance cannot be sustained in the absence of a direct operational connection.

Raghani Tradelink v. ITO (ITAT Ahmedabad):

• Citation: ITA No. 1692/Ahd/2025/2026 LLBiz ITAT(AHM) 68.

• Ratio: The Tribunal reiterated that ad-hoc disallowances or formulaic cost apportionments cannot be made without the Assessing Officer pointing out specific defects or discrepancies in the audited books of account.

Alidhara Texpro Engineers Pvt. Ltd. v. DCIT (ITAT Ahmedabad):

• Citation: ITA No. 925 & 3777/Ahd/2007.

• Ratio: Apportionment of corporate/management overheads on an arbitrary turnover ratio is impermissible when the eligible unit has separate profit & loss accounts capturing all functional expenditure.

2. Windmill Undertakings & Coordinate Bench Authorities on Section 80-IA

CIT v. Reliance Utilities and Power Ltd. (Bombay High Court):

• Citation: (2009) 313ITR 340 (Bom).

• Principle: Standalone funding and operational independence must be respected; notional cost attribution to profitable power units without factual establishment of fund diversion/expense deployment is invalid.

CIT v. Zandu Pharmaceuticals Works Ltd. (Bombay High Court):

• Citation 350 ITR 366/259 CTR 253 (Bombay) .

• Principle: Where direct expenses of an eligible industrial unit are duly booked and certified by an audit report, the Assessing Officer cannot apportion head office indirect administrative expenses based on a turnover formula unless a clear link to the unit’s operations is demonstrated.

DCIT v. MSPL Ltd. (ITAT Bangalore):

• Subject: Windmill Undertakings & Head Office Expenditure Allocation under Section 80- IA.

• Principle: Windmill power-generating units generally function on fixed Operation & Maintenance (O&M) contracts and grid-feeding arrangements with state utilities. General head office administrative salaries or executive overheads bear no functional relation to electricity generation; thus, allocating head office overheads to reduce windmill Section 80- IA profits is unjustified.

o Mandate of Section 80-IA (5): Requires the eligible business to be treated as a standalone source of income. If it operates autonomously without consuming head office resources, foreign costs cannot be imputed.

o Shift of Burden: The primary onus to produce audited financial statements is discharged once the Form 10CCB and unit-level accounts are filed. The burden then shifts entirely to the Revenue to pinpoint which specific administrative services benefited the eligible unit before any apportionment is made.

o Turnover Formula Fallacy: Merely having higher turnover does not justify higher overhead absorption, especially for passive infrastructure such as automated windmill generation.

4. Relief Prayed

The Ld. AO’s ad-hoc allocation of Rs. 14,77,741/- is purely conjectural. The direction of CIT(A) confirming the disallowance should be set aside and the full Section 80IA claim restored.”

7. We have heard the rival submissions and perused the material available on record. We find that the assessee has furnished the details of the two windmills, having capacities of 750 KW and 250 KW, along with the relevant profit and loss accounts and balance sheets, placed at pages 66 and 67 of the paper book. The said documents indicate that separate accounts were maintained in respect of the eligible windmill business for the purpose of claiming deduction under section 80-IA of the Act. In view of the separate books of account maintained by the assessee, we find merit in the contention that the expenses relating to the other business were not included in the accounts of the eligible business. We further note that the relevant documents were furnished before the Assessing Officer but were not properly considered while making the impugned disallowance. In these circumstances, we find no justification for sustaining the addition of Rs. 14,77,741/-. Accordingly, we set aside the order of the Ld. CIT(A) on this issue and direct the Assessing Officer to delete the impugned addition. Accordingly this ground of appeal is allowed.

8. The next issue relates to the disallowance of warranty expenses of Rs.52,37,441/- . On this issue the Ld. AR submitted that the assessee is engaged in the business of manufacturing and selling machinery and that the machinery supplied to customers carries a warranty obligation. In order to honour such warranty commitments, the assessee is required to incur expenditure on spare parts, repairs and other related services. It was contended that the warranty forms an integral part of the sale agreement and that the assessee cannot sell its machinery without undertaking such warranty obligations. The Ld. AR further drew our attention to pages 92 to 96 of the paper book, containing details of the warranty provided to various customers. It was accordingly submitted that the warranty expenditure was incurred in the ordinary course of business and was allowable as a business deduction. The Ld.AR submitted his written submission, the written submission is hereunder:

“Erroneous Addition on Account of Turnover Variation (Warranty Provisions) — Rs.52,37,441/

1. Facts of the Issue

The Ld. AO added Rs. 52,37,441/- as unaccounted turnover/income on the ground that the turnover in GSTR-1/GSTR-9 exceeded the turnover in the audited Profit & Loss Account. The Ld. CIT(A) confirmed the addition citing lack of documentary proof.

2. Submissions & Legal Arguments

2.1. The learned Commissioner of Income-tax (Appeals) [CIT(A)] erred on facts and in law in upholding the addition of Rs. 52,37,441/- made by the Assessing Officer (AO) to the returned business income by mischaracterizing a difference in statutory GST presentation as unaccounted sales or concealment of income.

2.2. The learned CIT(A) failed to appreciate that the Appellant provides a contractual 12-month standard warranty on sales of plastic printing and lamination machines to rectify or replace defective parts free of charge (FOC). As these replacement parts were supplied Free of Cost under an existing contractual warranty obligation without any consideration received or accrued, no income arose or accrued to the Appellant under the provisions of the Income-tax Act, 1961.

2.3. The learned authorities failed to appreciate that while FOC warranty supplies are required to be disclosed as taxable supplies in Form GSTR-9 under GST regulations, the accounting treatment in the audited books of accounts is structured strictly in accordance with Accounting Standard 29 (AS-29). The actual warranty expenses incurred during the year (Rs. 74,74,818/-) were netted off against the FOC warranty supply values (Rs. 52,37,441/-), and only the net operational warranty expense of Rs. 22,37,377/- was debited to the audited Profit & Loss Account.

2.4. The learned CIT(A) failed to appreciate that the provision for warranty claims is an ascertained liability computed scientifically on a consistent basis year-to-year based on past trends, technical estimation, and industry standards, meeting all statutory criteria under AS-29, and there is zero suppression of sales or concealment of income.

3. Relief Prayed

The addition of Rs. 52,37,441/- represents an accounting reconciliation difference between GST gross declarations and P&L net accounting, and hence deserves to be deleted in full.

3. PRAYER & RELIEF SOUGHT

In view of the facts, legal provisions, and supporting documentation contained in this Paper Book, the Appellant humbly prays before Your Honours to:

1. Delete the restriction of Section 80IA deduction amounting to Rs. 14,77,741/-.

2. Delete the disallowance made u/s 40(a)(ia) amounting to Rs. 6,96,190/-.

3. Delete the addition on account of turnover variation / FOC warranty supplies amounting to Rs. 52,37,441/-.”

9. The Ld. DR, on the other hand, supported the order of the Ld. CIT(A).

10. We have considered the rival submissions and perused the material available on record. It is evident that the warranty obligation is an integral part of the sale of machinery by the assessee. The expenditure incurred towards spare parts, repairs and other services in connection with the warranty cannot be considered in isolation from the underlying sale transactions. We further find that the assessee has furnished supporting details of the warranty obligations in respect of various customers at pages 92 to 96 of the paper book. In the light of these documents and the nature of the assessee’s business, we find merit in the contention that the warranty expenditure is incurred in the ordinary course of business. Accordingly, we find no justification for sustaining the impugned disallowance. The order of the Ld. CIT(A) on this issue is set aside, and the Assessing Officer is directed to delete the disallowance of warranty expenses. Accordingly, this ground of appeal is allowed.

11. The next issue relates to the disallowance arising from the tax deducted at source on royalty payments of Rs.23,20,632/- made by the assessee to an Italian company. The Ld. AR submitted that the assessee had made royalty payments to a foreign company and had duly deducted tax at source under section 195 of the Act. The tax so deducted was deposited into the account of the Central Government. It was contended that section 195 governs payments to non-residents, whereas section 194J of the Act applies to specified payments, including royalty, subject to the conditions prescribed therein. The assessee had, therefore, deducted tax under section 195 of the Act, considering the foreign status of the recipient.

12. The Ld. AR further submitted that, once the tax had been duly deducted and deposited, the disallowance could not be sustained merely on the ground that the tax ought to have been deducted under a different provision. It was accordingly contended that the action of the Assessing Officer was unjustified. The extract of written submission filed by assessee is hereunder:

“IMPUGNED DISALLOWANCE U/S 40(a)(ia) FOR ROYALTY PAYMENT (Rs. 6,96,190/-)

1. Facts of the Issue

The Ld. AO made a 30% disallowance u/s 40(a)(ia) on a royalty payment of Rs. 23,20,632/-alleging non-deduction of TDS u/s 194J. The Ld. CIT(A) directed the AO to verify tax deduction.

2. Submissions & Legal Arguments

Inapplicability of Section 194J: Section 194J applies strictly to payments made to residents. The royalty payment in question was made to M/s Cerutti Packaging Equipment, Italy, a non-resident foreign corporate entity, under a Technology Transfer Agreement dated 29/12/2016 for purchasing technology rights of “Rotogravure Press Model R-982”.

Compliance u/s 195: Therefore, withholding provisions were governed exclusively by Section 195 (payments to non-residents) and not Section 194J.

Prior Advance Deduction & Payment: Under the “Net-of-Tax” terms of the agreement, the Appellant bore the tax liability and paid TDS in advance u/s 195 amounting to Rs. 27,87,489/- via Challan No. 23908 on 07/03/2018 through State Bank of India. Forms 15CA and 15CB were duly certified and filed.

No Default u/s 40(a)(i) / 40(a)(ia): Since tax was fully paid to the credit of the Central Government prior to the financial year under consideration, no disallowance under Section 40(a)(ia) or 40(a)(i) can legally survive. The lower authorities erred by misconstruing a domestic trade entry / ledger presentation with a failure to deduct TDS.

3. Relief Prayed

It is prayed that the direction of verification be converted into an absolute quashing/deletion of the disallowance of Rs. 6,96,190/-.”

13. The Ld. DR supported the order of the Ld. CIT(A), who had restored the issue to the file of the Assessing Officer for examination.

14. We have heard the rival submissions and perused the material available on record. The controversy, as emerges from the record, relates to the provision under which tax was required to be deducted at source on the royalty payment made to the foreign company. The assessee’s contention is that tax was duly deducted under section 195 of the Act and deposited with the Government. In the facts of the present case, the assessee has claimed that the applicable tax was duly deducted and deposited and that the disallowance was sustained merely on account of the provision under which the tax was deducted. We find that the Ld. CIT(A) restored the issue to the Assessing Officer for examination, despite the assessee’s contention regarding deduction and deposit of tax. In view of the material placed before us and the specific facts of the case, we find merit in the assessee’s contention that the disallowance cannot be sustained merely on the basis of the alleged difference in the applicable TDS provision, without establishing the statutory basis for such disallowance. Accordingly, we set aside the order of the Ld. CIT(A) on this issue and direct the Assessing Officer to delete the impugned disallowance, since the tax deducted at source on the relevant payment was duly deposited with the Central Government. Accordingly, this ground of appeal is also allowed.