Gujarat High Court
Commissioner Of Income Tax - I vs Gujarat State Fertilizer & Chemicals ... on 17 September, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/18/2014 ORDER DATED: 17/09/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 18 of 2014
With
R/TAX APPEAL NO. 149 of 2014
With
R/TAX APPEAL NO. 900 of 2018
With
R/TAX APPEAL NO. 901 of 2018
With
R/TAX APPEAL NO. 902 of 2018
With
R/TAX APPEAL NO. 239 of 2022
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COMMISSIONER OF INCOME TAX - I
Versus
GUJARAT STATE FERTILIZER & CHEMICALS LTD
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Appearance:
KARAN G SANGHANI(7945) for the Appellant(s) No. 1
MR MANISH J SHAH(1320) for the Opponent(s) No. 1
RULE SERVED for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
Date : 17/09/2025
COMMON ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Standing Counsel Mr. Karan Sanghani for the appellants and learned advocate Mr. Manish Shah for the respondent.
2. These appeals are filed under Section 260A of the Income tax Act, 1961 (for short 'the Act') and following substantial questions of law are framed while admitting the Appeals: Page 1 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025
NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined TAX APPEAL NO. 18 OF 2014:
"[3.1] Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in upholding the decision of CIT (A) that deduction u/s. 80IA(4) is allowable to the assessee for generation of power for captive consumption?
[3.2] Without prejudice to the Revenue's stand that allowance of deduction u/s.80ΙΑ (4) by the CIT (A) ought not to have been upheld by the ITAT, whether the facts and the circumstances of the case and in law, the ITAT was justified in allowing assessee's claim of deduction of Rs.49.78 crores u/s.80IA (4) of the Act, since the assessee had adopted rate of such power of Rs.5.42 per unit for captive consumption as against the market rate of Rs.2.11 per unit being supplied by the Gujarat Electricity Board to is consumers?"
TAX APPEAL NO. 149 OF 2014:
"(i) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in substituting A.O's working with its own subjective estimate, reducing the disallowance of interest made by Page 2 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined the A.O. under Section 14A r.w.s. 36(1) (iii) of the Act, even though the ITAT had itself upheld the said disallowance in principle ?
(ii) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in reducing the disallowance of interest under Section 14A r.w.s. 36(1) (iii) of the Act, to an ad hoc and arbitrary figure of Rs. 5 lacs, without giving any basis for the same, by ignoring the fact that the disallowance of interest made by the Α.Ο. 10% of exempt income was fair and reasonable ?
(iii) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in reducing the disallowance of interest made by the A.O. u/s. 14A r.w.s. 36(1) (iii) of the Act, without appreciating that the assessee had failed to furnish evidence to substantiate the allowability of the entire interest expenditure in terms of the provisions of Section 36(10(iii) of the Act ?
(iv) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in upholding the decision of CIT(A) that deduction u/s 80IA(4) is Page 3 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined allowable to the assessee, without appreciating the fact that the deduction u/s.
80IA (4) is not allowable to the assessee for generation of power for captive consumption ?
(v) Without prejudice to the Revenue's stand that allowance of deduction u/s 80IA(4) by the CIT(A) ought not to have been upheld by the ITAT, whether on the facts and in the circumstances of the case and in law, the ITAT was justified allowing assessee's claim in of of deduction Rs. 82.53 crores u/s 80IA (4) of the Act, without appreciating the fact that the profits of eligible business of power generation plant have been inflated by the assessee by adopting excessive sale rate of Rs. 5.49 per unit for power supplied to its own units for captive consumption as against the market rate of Rs. 2.36 per unit at which power was supplied to the Gujarat Electricity Board, thereby debiting excessive expenditure of Rs. 52 crores in its non-80IA Unit ?"
TAX APPEAL NO. 900 OF 2018:
TAX APPEAL NO. 901 OF 2018:
TAX APPEAL NO. 902 OF 2018:
"Whether on the facts and in circumstances of the case, the learned ITAT has erred in law Page 4 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined and on facts in allowing the assessee's claim for deduction u/s. 80IA of the Income Tax Act, 1961 for generating power for captive consumption, when the assessee had adopted rate on which the GEB supplied power to its consumers ignoring the rate which power generating company supplied its power to GEB?"
TAX APPEAL NO. 239 OF 2022:
"Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in allowing the assessee's claim for deduction u/s. 80IA of the Income Tax Act, 1961 for generating power for captive consumption, when the assessee had adopted rate on which the GUVNL supplied power to its consumers ignoring the rate on which power generating company supplied its power to GUVNL?"
3. At the outset, learned advocates for both the sides submitted that the issue of deduction under Section 80IA of the Act allowable to the respondent assessee for generation of power for captive consumption is no more res-integra in view of the decision of the Hon'ble Supreme Court Page 5 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined of India in case of Commissioner of Income Tax v. Jindal Steel and Power Ltd., reported in 460 ITR 162.
4. So far as question with regard to deduction under Section 80IA(4) allowable to the assessee in case of generation of power for captive consumption is concerned, the same is decided by the Hon'ble Apex Court in the aforesaid decision of Jindal Steel and Power Ltd.(Supra)as under:
"18. There is also no dispute that the assessee or rather, the captive power plants of the assessee are entitled to deduction under section 80-IA of the Act. For the purpose of computing the profits and gains of the eligible business, which is necessary for quantifying the deduction under section 80- IA, the assessee bad recorded in its books of accounts that it had supplied power to its industrial units at the rate of Rs. 3.72 per unit which rate is disputed by the revenue as not being the market value of electricity.
19. While the assessing officer accepted the claim of the assessee for deduction under section 80-IA, he, however, did not accept Page 6 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined the profits and gains of the eligible business computed by the assessee on the ground that those were inflated by showing supply of power to its own industrial units for captive consumption at the rate of Rs. 3.72 per unit. Assessing officer took the view that there was no justification on the part of the assessee to claim electricity charge at the rate of Rs. 3.72 for supply to its own industrial units when the assessee was supplying surplus power to the State Electricity Board at the rate of Rs. 2:32 per unit. Finally, the assessing officer held that Rs. 2.32 per unit was the market value of electricity and on that basis, reduced the profits and gains of the assessee thereby restricting the claim of deduction of the assessee under section 80-IA of the Act.
20. We have already analyzed Section 80-IA of the Act. There is no dispute that respondent- assessee is entitled to deduction under section 80-IA of the Act for the relevant assessment year. The only issue is with regard to the quantum of profits and gains of the eligible business of the assessee and the resultant deduction under section 80-IA of the Act. The higher the profits and gains, the higher would be the quantum of deduction. Conversely, if the profits and gains of the Page 7 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined eligible business of the assessee is determined at a lower figure, the deduction under section 80-IA would be on the lower side. Assessee had computed the profits and gains by taking Rs. 3.72 as the price of electricity per unit supplied by its captive power plants to its industrial units. The basis for taking this figure was that it was the rate at which the State Electricity Board was supplying electricity to its industrial consumers. Assessing officer repudiated such claim. According to him, the rate at which the assessee had supplied the surplus electricity to the State Electricity Board ie, Rs. 2.32 per unit, should be the market value of electricity. Assessee cannot claim two rates for the same good ie.. electricity. When it supplies electricity to the State Electricity Board at the rate of Rs. 2.32 per unit, it cannot claim Rs. 3.72 per unit for supplying the same electricity to its sister concern ie, the industrial units. This view of the assessing officer was confirmed by the CIT (A)
21. We have noticed that the Tribunal had rejected such contention of the revenue which has been affirmed by the High Court. In this proceeding, we are called upon to decide as to which of the two views is the correct Page 8 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined one."
5. So far as the question of applicability of the market rate for the purpose of allowing deduction of Section 80IA, the issue of allowability of the market rate is also decided by the Apex Court in case of the aforesaid decision of Jindal Steel and Power Ltd.(Supra)as under:
"28. Thus, market value of the power supplied by the assessee to its industrial units should be computed by Considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. It is clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial consumers Page 9 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined has to be taken as the market value for computing deduction under section 80-IA of the Act.
29. Section 434 of the 1948 Act lays down the terms and conditions for determining the tariff for supply of electricity. The said provision makes it clear that tariff is determined on the basis of various parameters. That apart, it is only upon granting of specific consent that a private entity could set up a power generating unit. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the concerned State Electricity Board. Thus, determination of tariff of the surplus electricity between a power generating company and the State Electricity Board cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of trade and commerce. It is determined in an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set Page 10 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined the buying tariff in terms of the extant statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Consequently, the price determined as per the power purchase agreement cannot be equated with the market value of power as understood in the common parlance. The price at which the surplus power supplied by the assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory regulations and the contract. Such a price cannot be equated with the market value as is understood for the purpose of Section 80IA (8). On the contrary, the rate at which State Electricity Board supplied electricity to the industrial consumers would have to be taken as the market value for computing deduction under section 80-IA of the Act.
30. Thus on a careful consideration, we are of the view that the market value of the power supplied by the State Electricity Board to the industrial consumers should he construed to be the market value of Page 11 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board's rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under section 80-IA of the Act.
31. That being the position, we hold that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market Le., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue.
32. Revenue has relied upon the decision of the Calcutta High Court in ITC Ltd. (supra). In that case, the High Court rejected the first contention of the revenue that the assessee therein was not entitled to the benefit under section 80-IA of the Act Page 12 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined because the power generated was consumed at home or by other business of the assessee. After holding so, the High Court however, answered the question on the point of computation of profits and gains of the eligible business against the assessee. On going through the judgment, we find that facts of that case are clearly distinguishable from the facts of the present batch of appeals. It is noticeable that though an opportunity was granted by the assessing officer to the assessee to adduce evidence to justify the price of electricity sold by it to its paper unit, the same could not be availed of by the assessee. The electricity generated was sold by the assessee entirely to its paper unit. There was no surplus electricity to be supplied to the State Electricity Board and consequently, there was no contract between the assessee and the State Electricity Board determining the rate of tariff for the electricity supplied by the assessee to the State Electricity Board. On the other hand, it was noticed that the Electricity Act, 2003 had come into force whereby and whereunder, the rate at which electricity could be supplied is determined, notably by Sections 21 and 22 Page 13 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined thereof. That apart, there is the tariff regulatory commission which has the mandate for fixing the rates for sale and purchase of electricity by the distribution licensee. Thus it was noted that there is an inbuilt mechanism to ensure permissible profit both to the generating companies and to the distribution licensees Therefore, it was held by the High Court that the assessee's generating unit could not claim any benefit under section 80-IA of the Act computing the profits and gains on the basis of the rate chargeable by the distribution licensee from the consumer and that the benefit could only be claimed on the basis of the rates fixed by the tariff regulatory commission for sale of electricity by the generating company. Facts being clearly distinguishable, this decision can be of no assistance to the revenue."
6. Therefore, both the questions are now squarely covered by the aforesaid decision of the Hon'ble Apex Court as the Tribunal has also considered and allowed deduction under Section 80IA(4) to the respondent assessee for generation of power for captive consumer and Tribunal has Page 14 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined also considered the rate per unit for captive consumption more than the rate per unit of the power supplied by the Gujarat Electricity Board to its consumer, no interference is called for in the impugned orders of the the Tribunals.
The Tax Appeal Nos. 18 of 2014, 900 of 2018, 901 of 2018, 902 of 2018 and 239 of 2022 are, therefore, dismissed.
7. So far as question Nos. (i) to (iii) in case of Tax Appeal No. 149 of 2014 are concerned, with regard to disallowance of interest under Section 36(1)(iii) of the Act and disallowance of interest under Section 14A read with Section 36(1)(iii) of the Act, it was submitted by learned advocates for both the sides that the said issues are decided by this Court in case of the respondent assessee in Tax Appeal No. 82 of 2013 as under:
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NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined "3.8 The moot question here is as to whether the CIT (Appeals) and the Tribunal were right in setting aside the order of Assessing Officer, whereby it disallowed the sum of Rs.91.80 lakh, applying the provisions of Section 14A of the Act on the ground that the assessee had used interest bearing borrowed funds for earning dividend during the assessment year under question. The dividend income earned was of Rs.9.8 crores and the estimate of expenditure was assessed at the rate of 10% of the total income. Had the Revenue been successful in establishing that the assessee had incurred the expenses to earn the dividend income from the borrowed funds, the entire discussion of application of Section 14A of the Act could be understood. However, when both the CIT (Appeals) and the Tribunal have noted that the assessee had sufficient funds available with it, which was more than the amount it invested for earning the dividend income, both these authorities have correctly approached the issue by setting aside the order of disallowance under Section 14A of the Act in respect of interest expenditure.
When the very basis for employing Section 14A of the Act on factual matrix is lacking, the Page 16 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined disallowance to the extent of 10% of dividend income was not permissible. When it transpires from record that the assessee's own funds were at higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends, the Tribunal committed no error in disallowing the sum of Rs.91.80 lakh.
3.9 As far as other administrative expenses are concerned, the Revenue had requested to restore the matter back to the Assessing Officer. However, to put an end to the entire dispute with regard to other expenses, the assessee permitted disallowance of Rs.5 lakh. The Tribunal considering the volume and quantum of investment disallowed the said amount of Rs.5 lakh, which though is on estimated basis, it is a reasonable base and, therefore, the first question merits no consideration."
8. So far as question Nos. (iv) and (v) are concerned, the same are already covered by the decision of the Hon'ble Apex Court in case of Page 17 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025 NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined Commissioner of Income Tax v. Jindal Steel and Power Ltd.(Supra).
9. Learned advocate Mr. Karan Sanghani submitted that this Court admitted the Tax Appeal after referring the decision in Tax Appeal No. 82 of 2013 only because the revenue was before the Hon'ble Apex Court by way of SLP (C) No. 1174 of 2014 and the Hon'ble Apex Court was seized with the matter.
10. It was submitted that the SLP (C) No. 1174 of 2014 thereafter was given Civil Appeal No. 4441 of 2018 and the same is disposed of along with Civil Appeal No. 6949-6950 /2004 in case of The Commissioner v. Mahindra and Mahindra Ltd. On 24.4.2018.
11. It was, therefore, pointed out that the decision of this Court in Tax Appeal No. 82 of 2013, has achieved finality.
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NEUTRAL CITATION C/TAXAP/18/2014 ORDER DATED: 17/09/2025 undefined
12. Therefore, in view of the decision of this Court in Tax Appeal No. 82 of 2013 in case of respondent assessee for A.Y. 2008-09, the Tax Appeal No. 149 of 2014 also stands dismissed. The questions of law are answered in favour of the assessee and against the revenue.
(BHARGAV D. KARIA, J) (PRANAV TRIVEDI,J) SAJ GEORGE Page 19 of 19 Uploaded by SAJ GEORGE(HC01069) on Tue Sep 23 2025 Downloaded on : Tue Sep 23 22:10:21 IST 2025