ITAT Ahmedabad remands Sun Pharma LLP capital loss claim; other issues largely settled on existing precedents

Background and procedural history

Sun Pharma Laboratories Ltd. filed an appeal, and the Revenue filed a cross-appeal, before the ITAT Ahmedabad against the order dated 01.08.2024 passed by the CIT(A), NFAC, Delhi for Assessment Year 2016-17 under Section 250 of the Income Tax Act 1961.

The assessee is engaged in the business of manufacturing and trading of pharmaceutical products, with manufacturing facilities in Jammu & Kashmir, Sikkim and Guwahati.

  • Original return filed on 29.11.2016:

    • Total income under normal provisions: Rs.447,76,25,270
    • Book profit under Section 115JB: Rs.495,02,76,436

  • Revised return filed on 29.03.2018 (only for additional TDS credit):

    • Total income under normal provisions: Rs.447,76,25,270
    • Book profit under Section 115JB: Rs.495,02,76,436

  • Assessment order dated 26.12.2019 under Section 143(3) r.w.s. 92CA(3) by DCIT, Circle 2(1)(1), Vadodara:

    • Assessed income under normal provisions: Rs.1,400,68,90,290
    • Book profit under Section 115JB: Rs.2,387,08,38,503

The CIT(A) granted partial relief, deleting some additions/disallowances and sustaining others. Both sides approached the Tribunal. The ITAT has disposed of the cross-appeals through a consolidated order dated 31/07/2026.

Issues in assessee’s appeal (ITA No.1733/Ahd/2024)

The assessee challenged multiple issues, key among them:

  1. Deduction under Section 80-IB/80-IE on:

    • Interest on staff advances
    • Interest on statutory/bank deposits

  2. Disallowance under Section 14A r.w. Rule 8D amounting to Rs.22,33,819 in relation to exempt income of Rs.2,98,76,675 from tax-free bonds.

  3. Consequential enhancement of Section 80-IB/80-IE deduction following any disallowances.

  4. Disallowance of short-term capital loss of Rs.263,69,11,581 on transfer of 95% partnership interest in Silverstreet LLP.

  5. Non-reduction of the same LLP loss while computing book profit under Section 115JB.

  6. Initiation of penalty proceedings under Section 271(1)(c).

Only the major contested grounds and the Tribunal’s findings are summarised below.

Denial of Section 80-IB/80-IE deduction on interest from staff advances and statutory/bank deposits

Assessee’s contention

The assessee argued that:

  • Deduction under Section 80-IB/80-IE should extend to interest income arising from:
    • Staff advances
    • Statutory/bank deposits
  • According to the assessee, the expression used in these provisions is “profits and gains derived from the business” of the eligible undertaking, and the interest in question was integrally linked to that business activity.

Tribunal’s reasoning and decision

The ITAT noted that this precise issue had already been examined in earlier years in the assessee’s own cases. Coordinate benches, including Amritsar Bench and Ahmedabad Bench, had consistently held that:

  • Interest on delayed payments from customers could qualify for deduction.
  • However, interest on staff advances and interest on FDRs/statutory deposits does not qualify as profits “derived from” the eligible industrial undertaking within the meaning of Section 80-IB/80-IE.

Relying on:

  • Earlier orders in assessee’s own case for AYs 2011-12 to 2015-16, including ITA No.741/Ahd/2019 for AY 2015-16, and
  • The Amritsar Bench decisions followed therein,

the Tribunal held that the matter was squarely covered against the assessee.

Result:

  • Ground relating to Rs.4,81,888 interest on staff advances and statutory/bank deposits was dismissed.
  • No deduction under Section 80-IB/80-IE allowed on this interest component.

Disallowance under Section 14A r.w. Rule 8D – Rs.22,33,819

Facts and computation

  • Exempt income: Rs.2,98,76,675 (interest from tax-free bonds).
  • Suo motu disallowance by assessee under Section 14A: Rs.1,02,500.
  • Assessing Officer, after recording dissatisfaction with the assessee’s working, invoked Rule 8D and made further disallowance of Rs.22,33,819.
  • CIT(A) sustained the disallowance, relying on earlier years’ orders in the assessee’s group cases.

Assessee’s stand before ITAT

The assessee submitted, in substance, that:

  • All investments generating exempt income were old; no fresh investment was made during the relevant year.
  • The assessee had sufficient interest-free own funds to cover the investment in tax-free bonds.
  • If own funds exceeded the value of investments, no interest disallowance under Rule 8D(2)(ii) should be made, as per settled judicial principle.
  • Only a limited administrative expenditure, if any, should be considered, and computational errors by the Assessing Officer needed correction.

Tribunal’s analysis

The ITAT applied established jurisprudence that:

  • Where an assessee has adequate interest-free own funds to cover investments generating exempt income, a presumption arises that such investments were made out of those funds.
  • In such circumstances, no disallowance of interest under Rule 8D(2)(ii) is warranted.

However, the Tribunal also recognised that:

  • Some administrative expenditure is deemed to be incurred in relation to exempt income, and
  • Rule 8D(2)(iii) prescribes a formula-based disallowance of 0.5% of the average value of investments that have generated exempt income.

Directions issued

The Tribunal directed the Assessing Officer to:

  1. Verify whether the assessee had sufficient interest-free own funds during the year to cover the investments in tax-free bonds.
  2. If yes, then:
    • No disallowance of interest expenditure under Rule 8D(2)(ii) shall be made.
  3. For administrative expenses:
    • Restrict the disallowance to 0.5% of the average value of investments yielding exempt income as per Rule 8D(2)(iii),
    • After giving credit for the assessee’s suo motu disallowance of Rs.1,02,500.

Result:

  • Ground on Section 14A disallowance was allowed for statistical purposes, with the matter remanded to the AO for limited verification and recomputation.

Short-term capital loss on transfer of partnership interest in Silverstreet LLP – Rs.263,69,11,581

Transaction structure and claim

The core controversy in the assessee’s appeal related to a claimed short-term capital loss of Rs.263,69,11,581 arising from the transfer of its 95% partnership interest in Silverstreet LLP. Key factual aspects: