RELIANCE POWER LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 15(3)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL
“D” BENCH, MUMBAI
BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER&
SHRI OMKARESHWAR CHIDARA, ACCOUNTANT MEMBER
(Physical hearing)
DCIT – 15(3)(1), Mumbai
Room No. 460, 4th Floor,
Aayakar Bhavan, M.K. Road,
Mumbai – 400020]
Vs
Reliance Power Limited
H-Block, 1st Floor, Dhirubhai Ambani
Knowledge City, Koperkhairane,
Navi Mumbai-400710
[PAN: AAACR2365L]
Appellant / Revenue

Respondent / Assessee
Reliance Power Limited
Reliance Centre, Ground Floor, 19
Walchand Hirachand Marg,
Ballard Estate, Mumbai – 400001. [PAN: AAACR2365L]
Vs
DCIT – 15(3)(1), Mumbai
Room No. 460, 4th Floor, Aayakar
Bhavan, M.K. Road,
Mumbai – 400020]
Appellant / Assessee
Respondent / Revenue

C.O. No. 71/MUM/2023 (AY: 2013-14)
(Arising out of ITA No. 890/Mum/2023)

Reliance Power Limited
Reliance Centre, Ground Floor, 19
Walchand Hirachand Marg,
Ballard Estate, Mumbai – 400001. [PAN: AAACR2365L]
Vs
DCIT – 15(3)(1), Mumbai
Room No. 460, Aayakar Bhavan,
M.K. Road,
Mumbai – 400020. Appellant / Assessee

Respondent / Revenue

Assessee by Shri Niraj Sheth, Advocate
Revenue by Shri Umashankar Prasad, CIT-DR
Date of Institution
21.03.2023
Date of hearing
07.08.2025
Date of pronouncement
14.10.2025

Order under section 254(1) of Income Tax Act

PER PAWAN SINGH, JUDICIAL MEMBER; 1. These cross appeals by assessee and as well as by revenue and Cross- objection by assessee in revenue’s appeal are directed against the order of ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023 Reliance Power Ltd. 2

ld. CIT(A) / NFAC dated 22.02.2023 for A.Y. 2013-14. The revenue in its appeal has raised following grounds of appeal: The assessee has raised following grounds of appeal;
“1 On the facts and in the circumstances of the case and in law, whether the Ld CIT(A) was justified in restricting the disallowance u/s 14A to the amount of exempt Income claimed by the Assessee rather than to amount disallowed by the Assessing officer as per provision of section-14A of the Income Tax Act, 1961 r.w. rule 8D of Income Tax Rules, 19627

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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Your appellant submits that under the facts and in the circumstances of your appellant's case the capital gains on sale of helicopter ought to be treated as long term capital gains for the purpose the of applying rate of tax thereon.

Your appellant submits that under the facts and in the circumstances of your appellant's case the CIT(A) and Learned Assessing Officer ought to have concluded that the deeming provisions of section 50 are applicable only with respect to the computation of capital gain and the deeming provision of section 50 cannot be extended to levy of tax and therefore the rate of tax applicable ought to have been taken as applicable to long term capital gains.

Your appellant submits that the assessing officer in the alternative be directed to consider only those investments which have actually yielded exempt during the year and excluding those investments which have not yielded any income during the year while working out the average value of the investment.”
4. Brief facts of the case are that assessee is engaged in the business of generation of power, power project under development which includes coal, gas, hydro and solar based energy projects filed its return of income for A.Y.
2013-14 on 28.11.2013 declaring total income at Rs. 2.48 crores. The return was revised on 16.05.2024 offering certain additional income. The case was ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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selected for scrutiny. During the assessment, from the computation of income, the assessing officer noted that assessee has shown dividend of Rs.
2.17 crores which were claimed exempt under section 10(34) and 10(35) of Income Tax Act. The assessee has made suo moto disallowance under section 14A of Rs. 55,21,722/- related with exempt income. The suo moto disallowance was not accepted by the assessing officer. The assessing officer asked the assessee to furnish complete details of exempt income and issued show cause notice as to why expenses incurred for earning exempt income should not be disallowed as per section 14A read with Rule 8D. The assessee filed its reply dated 08.09.2025. The assessee submitted that they have made suo mote disallowance of Rs. 55.21 lakhs. During the relevant period, they have earned dividend income of Rs. 2.17 crores. The assessee furnished entire expenditure incurred during the relevant financial year as well as working of suo moto disallowance under section 14A. It was explained that out of total expenditure is approximately Rs. 119.52 Crore, out of which Rs.
47.63 Crore is related with employee cost. Rs. 9.01 Crore is incidental cost and Rs. 5.99 Crore is legal and professional expenses. It was submitted that dividend income was credited in the account and was reinvested directly to the mutual fund investment. The assessee incurred normal administrative expenses on day to day management and business affairs of the company or to various subsidiaries. The working of suo moto disallowances of Rs.
55,21,722/- was also furnished, with its justification. The working of suo moto disallowances is recorded by assessing officer on page 4 of assessment order. The assessee also explained the scope of section 14A, details of ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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computation of book profit. The assessee has not sold any share which was on investment and realised on profit on redemption on mutual fund. The assessee also explained that there was various scenario related to investment on which exempt income were earned, firstly investments having no dividend income and no capital gain, thus, no income, secondly, investment having no dividend income and having taxable profit on sale, not exempt income.
Thirdly, investment having dividend income and having taxable profit in sale, one exempt another taxable and fourthly, investment having dividend income and not having taxable profit on sale, thus, only exempt income. The assessee also stated that apportionment of expenditure incurred cannot be made. The assessee also stated that expenses incurred for exempt income cannot be added back to book profit under section 115JB.To support their various contentions, the assessee also relied on various case laws. The reply of assessee was not accepted by assessing officer. The assessing officer invoked the provisions of Rule 8D and worked out the disallowance. The assessing officer worked out disallowance of Rs. 50.48 crores and after allowing set off of suo mote disallowance made addition of Rs. 49.93 crores and also added such book profit under section 115JB.
5. The assessing officer further noted that during the year under consideration, the assessee company is sold a helicopter and has shown long term capital gain. The assessing officer further noted that helicopter was acquired from Reliance Natural Resources Ltd (RNRL) on demerger during F.Y. 2010-11. The helicopter was sold during the year for Rs. 8.84 crores. The written down value of this block of asset was of Rs. 25.34 lakhs. The differential value of ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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Rs. 8.58 (8.84 – 25.34 lakhs) was treated as capital gain. The assessee considered such gain as long term capital gain on the ground that it was sold after holding for more than 36 months. During the assessment, the assessee was asked to explain why gain arising from sale of asset (Helicopter) being part of depreciable asset used for business purpose and depreciation was claimed in earlier years should not be considered as short term capital gain.
The assessee filed its reply dated 11.02.2016. In the reply, the assessee stated that helicopter was purchased in 2005 and was held for more than 36
months, thus, it became a long term capital gain as per definition of section 2(29A) of the Act. Thus, any profit or loss arising of such asset should be treated as long term capital gain or loss. The assessee company have earned long term capital gain and offered it for taxation. It was further submitted that fiction created by section 50 of the I.T. Act regarding depreciable asset cannot change long term assets to short term capital asset. To support their contention relied on the decision of Mumbai Tribunal in Komac Investment &
Finance (P) Ltd. (2011) (4) TMI 705 and the decision of Bombay High Court in Manali Investment (2013) (12) TMI 333. The submission of assessee was not accepted by assessing officer. The assessing officer by referring the provision of section 50 of Income Tax Act noted that where a capital asset forming part of block of asset in respect of which depreciation is allowed, is transferred and block of asset ceases to exist, then the resultant capital gain shall be deemed to be a short term capital asset and, if the assessee sold asset forming part of block of asset, depreciable under the act, the income arising from such transfer is considered as short term capital gain. The ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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helicopter was a part of block of asset as a plant & machinery in respect of depreciation was claimed. The helicopter was used for the business and provision of assessee company and transferred thereof is nothing but a short term capital gain. The case law relied by assessee was differentiated on helicopter as short term capital gain and brought the same to tax.
6. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed detailed written submission against both the additions. The submission of assessee on disallowance under section 14A are recorded on page no. 9 to 29 of order of ld. CIT(A). The assessee in its submission furnished working of suo moto disallowance, total number of mutual fund transaction of 206, out of which 204 transaction related to purchases of unit of mutual fund in dividend plan from which dividend is earned. The dividend was directly received in the bank account and not incurred any expenses in relation to exempt income.
Therefore, the provision of section 14A does not attract. Further, the assessing officer has not appreciated the method of working out suo moto disallowance in relation to exempt income. The assessee furnished the details of share capital, reserve and surplus and tax free investment available with the assessee company. The assessee relied on various case laws on the ratio of law that when interest free funds are available then presumption can be drawn that investments were out of interest free funds. In alternative, it was also submitted that no disallowance under section 14A can be made in respect of investment which have not yielded any exempt income. In without prejudiced submission, it was submitted that disallowance may be made in ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
taxmann.com 415 (Delhi). In other without prejudiced submission, the assessee submitted that disallowance must be restricted to the exempt income of Rs. 2.17 crores earned during the year. To support such submission, the assessee relied on number of decisions has recorded on page no. 24 & 25 of impugned order.
7. On the treatment of long term capital gain on sale of helicopter as short term capital gain, the assessee submitted that helicopter was acquired from Reliance Natural Resources Ltd.(RNRL) on demerger during F.Y. 2010-11 and is sold during the year under consideration. The written down value of block of asset was Rs. 25.34 lakhs, thus, differential amount of Rs. 858.96 lakhs has been treated as capital gain by assessing officer. The assessee submitted that helicopter was purchased in 2005 and was held for more than 36
ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
No. 615/2014 (Del) and various decisions of Tribunal. On the treatment of long term capital gain on sale of helicopter as short term capital gain, the ld.
CIT(A) upheld the action of assessing officer by holding that excess earned on sale of part of block of asset on which depreciation is allowed shall be deemed to be capital gain arising from transfer of short term capital asset.
9. Further, aggrieved both the parties have filed their respective parties. The revenue has challenged the action of ld. CIT(A) in restricting the disallowance under section 14A to the extent of exempt income. Similarly, the assessee has challenged the action of ld. CIT(A) in upholding the action of assessing officer in treating the gain earned on sale of helicopter as short term capital gain. The assessee has also filed its CO by raising grounds of objection that AO be directed to consider only those investments which have actually yielded exempt during the year and excluding those investments which have not yielded any income during the year while working out the average value of the investment.
10. We have heard the submission of learned Authorised Representative (ld. AR) of the assessee and the learned Commissioner of Income Tax – Departmental
Representative (CIT-DR) for the revenue. Firstly, we are considering the grounds of appeal raised by revenue in its appeal in ITA No. 890/Mum/2023
and the Grounds raised in CO by assessee. The ld. AR of the assessee submits that during the year under consideration, the assessee earned exempt income of Rs. 2.17 crores. The assessee in the suo moto

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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disallowance made disallowance of Rs. 55,21,722/-. The assessing officer provide a justification of suo moto disallowances. The assessing officer disregarded the explanation of assessee and invoked the provision of Rule
8D. The assessing officer made disallowance of Rs. 50.48 crores and after allowing set off of suo moto disallowances of Rs. 55.21 lakhs made a net disallowance of Rs. 49.93 crores and also added such disallowances to the book profit. The ld. CIT(A) restricted the disallowance under section 14A to the extent of exempt income and also removed it from book profit. The ld.
AR of the assessee submits that it is a well-settled principle in income tax proceeding that disallowance under section 14A cannot exceed the exempt income. During the assessment, the assessee furnished entire expenditure incurred during the relevant financial year as well as justification of suo moto disallowance. The total expenditure incurred by assessee was about 119.50
crores, out of which 47.63 crores was on account of employee cost and Rs.
9.01 cost on incidental cost and bout 6 crores was on legal and professional expenses. The assessee explained that dividend income was credited in the account of assessee and was re-invested directly to the mutual fund investment. The ld. AR further submits that as per decision of special bench of Delhi Tribunal in ACIT vs Vireet Investment Pvt. Ltd. (supra) wherein it was held that only those investments which yielded the exempt income may be considered for the purpose of disallowance under Rule 8D(iii) and such disallowances cannot be adjusted to book profit. The ld. AR of the assessee submits that he fully supports the order of ld. CIT(A) on disallowance under section 14A. In alternative submission, the ld. AR of the assessee submits

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
11. On the other hand, ld. CIT-DR for the revenue supported the order of assessing officer. The ld. CIT-DR for the revenue submits that assessing officer made disallowance as per formula prescribed in Rule 8D.
12. We have considered the submission of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by lower authorities as well as by ld. AR of the assessee. We find that during the year under consideration, the assessee has shown exempt income to the extent of 2.17 crores. As recorded in earlier parts, the assessing officer invoked the provision of Rule 8D and made disallowance of section 14A to the extent of Rs. 49.93 crores after allowing set off of suo moto disallowance. We find that ld. CIT(A) on considering the submission of assessee restricted the disallowance to the extent of exempt income. We further find lf CIT(A) also deleted the adjustment from book profit under section 115JB. We find that order of ld. CIT(A) in deleting the addition/ disallowance under section 14A form book profit under section 115JB is in consonance of decision of Delhi Tribunal in ACIT vs Vireet
Investment Pvt. Ltd. (supra). Therefore, we do not find any infirmity in the order passed by ld. CIT(A) to that extent.
13. We also find that assessee has also challenged the action of ld. CIT(A) in restricting the disallowance under section 14A with a specific request that only investment which yielded exempt income should be considered for the ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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purpose of disallowance under Rule 8D(iii). Thus, considering the decision of Delhi Tribunal in Vireet Investment Pvt. Ltd., we direct the assessing officer to re-compute the disallowance under Rule 14A in accordance with the decision of special bench of Delhi Tribunal in Vireet Investment. In the result, grounds of appeal raised by revenue in its appeal is dismissed and consequently, the grounds of appeal raised by assessee in its cross objection is allowed for statistical purpose.
ITA 1348/Mum/2023 (A.Y. 2013-14) (Assesses Appeal)
14. In assessee’s appeal, the sole ground of appeal relates to treating the gain on sale of helicopter as short term capital gain against the long term capital gain claimed by the assessee. The ld. AR of the assessee submits that assessee sold a helicopter for Rs. 8.84 crores. The said helicopter was purchased in 2005 which was acquired by assessee-company in 2010 on demerger from RNRL. The ld. AR of the assessee fairly submits that on the block of asset, the assessee claimed depreciation in past. The opening
Written Down Value (WDV) of block as on 01.04.2012 was Rs. 25.33 crores and the assessee earned capital gain of Rs. 8.58 crores. The said capital gain was set off against long term capital losses. The working of computation of income is provided as per page 1 of factual paper book. Before AO, the assessee explained that deeming fiction of section 50 was confined to computation of capital gain and it did not result in convergent of ‘long term capital asset’ into ‘short term capital asset’. In other words, it was explained that all other purposes, such set off against the other losses, rate of tax exemption under section 54, 54F etc., the capital asset would remain a long

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
168 taxmann.com 328 (Mumbai – SB), while deciding the issue of rate of tax applicable on capital gain arising on sale of depreciable asset under section ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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50, by referring and relying upon the decision of juri iction High Court in CIT vs Ace Builders (P) Ltd. (2025) 281 ITR 210 and the decision of Hon’ble
Apex Court in CIT vs Dempo Co. Ltd. 387 ITR 354, has held that deeming fiction is only for the purpose of section 50 and all for other provisions including section 74, the asset remains a long term capital asset. The ld. AR of the assessee prayed that assessee is eligible to set off long term capital losses against the gain arising from sale of helicopter even though the said gain is regarded as gain arising from transfer from short term capital asset for the purpose of section 50. To support his submission, the ld. AR of the assessee also relied upon the decision of Hon’ble Bombay High Court in CIT vs Manali Investments (2013) 39 taxmann.com 4 (Bom), CIT vs Parrys
(Eastern) (P) Ltd. (2016) 384 ITR 264 (Bombay) and CIT vs Pursarth Trading
Co. (P) Ltd. (2013) 33 taxmann.com 482 (Bombay). The ld. AR of the assessee submits that copy of all said decision has already been placed on record.
15. On the other hand, the learned Commissioner of Income Tax – Departmental
Representative (CIT-DR) for the revenue supported the order of lower authorities. The ld. CIT-DR submits that once the helicopter became a part of block of asset it has lost its individual identity. The assessee, admittedly, availed benefit of depreciation, therefore, the assessee is seeking double benefit which is not permissible. The lower authorities categorically held that on sale of part block of asset, the gain is to be treated as short term capital gain.

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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term capital asset that fiction was to be confined only section 50 and it could not convert short term capital asset into long term capital asset and vice- versa for other purpose of the Act. Thus, rate of tax would be in term of section 112 at the rate of 20%.
18. We find that Hon’ble Juri iction High Court in CIT vs Ace Builders (P) Ltd.
(supra) in para 25 of order held that fiction created by the legislature in section 50 has to be confined to the purpose for which it is created. Section 50 was enacted with the object of denying multiple benefits to the owners of a depreciable asset, however, that restriction is limited to the computation of capital gains and not to the exemption provision. If depreciation has been availed on long-term capital asset, then, the capital gains has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain is arising out of short-term capital asset. In that case, the capital gains was invested in the manner prescribed in section 54E wherein exemption is provided on transfer of a long-term capital asset then long-term capital gains was subject to deduction. There also, the asset was a depreciable asset, however, while granting exemption under section 54E, which is applicable for long-term capital gains, the juri ictional High Court has held that for the purpose of exemption under section 54E, it has to be treated as long-term capital gains. We further find that in para 26 of this order it was held that the legal fiction created is deemed to the capital gain as a short-term capital gain and not to deemed that asset as a short-term capital asset and therefore cannot be said that section 50 converts the long-term capital asset into a short-term capital

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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asset. This principle and ratio of the Juri ictional High Court if is to be followed, then it is clear that the tax rate provided under section 112 which is applicable for a long-term capital gains will prevail. Once the High Court has held that section 50 does not convert a ''long-term capital asset'' to a ''short- term capital asset'', then the rate of tax is applicable for the transfer of a long-term capital asset has to be in accordance with section 112. The deeming fiction of section 50 cannot be imported under section 112. 19. We find that Hon’ble Apex Court in case of CIT vs V. S. Dempo Co. Ltd.
(2016) 74 taxmann.com 15 / 387 ITR 354 held that assessee is eligible to claim exemption under section 54E in respect of capital gain arising on transfer of capital asset on which depreciation has been allowed. Thus, the Hon’ble Apex Court had affirmed decision of Bombay High Court in CIT vs
Ace Builders (P) Ltd. (supra). We further find that Hon’ble Bombay High
While allowing such set off of long term capital loss, the Hon’ble High Court followed its decision in CIT vs Ace Builders (P) Ltd.
20. Further, in CIT vs Parrys (Eastern) (P) Ltd. (2016) 384 ITR 264 (Bombay), the Hon’ble Juri iction High Court held that when deemed short term capital gain arise on account of sale of depreciable asset that was held for a period to which long term capital gain would apply, said gain would be set off against brought forward long term capital losses and unabsorbed depreciation. In CIT vs Prasad Trading Co. (P) Ltd. 33 taxmann.com 482
(Bombay). The Hon’ble juri ictional High Court also held that long term

ITA Nos. 890 1348/Mum/2023 & C.O. 71/Mum/2023
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capital gain can be set off against short term capital gain calculated under section 50 on long term capital asset. Thus, in view of the aforesaid factual and legal binding precedent, the impugned asset (helicopter) is held to be a long term capital asset including for the purpose of section 74 and capital gain earned on sale of it would be set off against long term capital losses. In the result, ground of appeal raised by assessee is allowed.
21. In the result, appeal of revenue is dismissed. The appeal of assessee is allowed. The Cross Objection of assessee is allowed for statistical purpose.
Order was pronounced in the open Court on 14/10/2025. OMKARESHWAR CHIDARA
ACCOUNTANT MEMBER PAWAN SINGH
JUDICIAL MEMBER

MUMBAI, Dated: 14/10/2025
Biswajit

Copy of the order forwarded to:
(1)
The Assessee;
(2)
The Revenue;
(3)
The PCIT / CIT (Judicial);
(4)
The DR, ITAT, Mumbai; and (5)
Guard file.
By Order