TMI Blog2014 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... n share capital - The Tribunal is of the opinion that the matter needs to be reconsidered by the assessing officer – The matter was restored for fresh adjudication to find out whether, funds raised by the assessee and utilization thereof was for the purpose of acquiring a capital asset by way of its expansion or it is for the working capital of the existing business. Disallowance of investment written off – Held that:- Since the departmental appeal is already pending before the High Court against the order of this Tribunal for assessment year 2002- 03, reference to larger bench will not serve any purpose - Following the order of this Tribunal for the assessment year 2002-03, the order of assessing officer is set aside and the assessing officer is directed to allow 10% of the remaining investment written off as business loss as held by the earlier bench. Disallowance of loss on the loan to subsidiary company – Held that:- If the money was advanced for the purpose of acquiring a capital interest which is enduring in nature, then the loss or profit suffered in that process has to be treated in the capital field. The loss / profit was not earned / received in the process of earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri B. R. Baskaran (AM),JJ. For the Appellant : Shri Ajay Vohra For the Respondent : Shri M. Anil Kumar, C.I.T. Smt. S. Vijayaprabha ORDER Per N. R. S. Ganesan (JM) This appeal of the assessee is directed against the order of the assessing officer dated 21-10-2011 for the assessment year 2007-08. 2. The first ground of appeal is with regard to additional depreciation u/s 32(1)(iia) of the Act. 3. Shri Ajay Vohra, the ld.senior counsel for the assessee submitted that the assessee claimed ₹ 5,01,83,094 as additional depreciation in respect of new machinery and plant acquired after 30-09-2005. It is not in dispute that the assessing officer has allowed 10% of the additional depreciation for the assessment year 2006-07. The assessee claimed the remaining 10% of the depreciation for the year under consideration. However, the assessing officer disallowed the claim of the assessee. Referring to the report filed by the DRP (DRP), the ld.senior counsel pointed out that DRP misconstrued the provisions of section 32(1)(iia) of the Act and rejected the claim of the assessee on the ground that there is no provision for carry forward of any additional deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation cannot be disallowed by the assessing officer. 5. Referring to the objection filed before the DRP, the ld.senior counsel for the assessee submitted that section 32(1)(iia) is an incentive provision and enacted by the legislature with an intention to boost investment in industry so as to increase the productivity. A provision in taxing statute granting incentive for promoting growth and development should be construed liberally. According to the ld.senior counsel, hyper technical and legalistic approach would frustrate and defeat the very intention of the legislation. Therefore, such hyper technical approach should be avoided. 6. The ld.senior counsel submitted that a bare reading of section 32(1)(iia) clearly shows that the assessee is eligible for additional depreciation in case the new machinery and plant was acquired and installed after 31-03-2005. There is no restrictive condition in the clause for the eligibility of the assessee to claim additional depreciation. When the assessee is eligible for depreciation @20%, in the absence of any specific provision, the assessing officer cannot cut down the scope of deduction by referring to proviso to section 32(1)(ii) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt profit in the year in which the machinery was put to use, therefore, the additional depreciation could not be carried forward. According to the ld.DR, there is no provision in the Income-tax Act to carry forward the allowable depreciation when the assessee has sufficient profit. During the year under consideration, the assessee put to use the machinery for less than 180 days. Therefore, in view of proviso to section 32(1)(ii), the assessee is entitled only for 50% of the depreciation and not the entire rate of depreciation @20%. In view of the proviso, according to the ld.DR, the assessee is not entitled for additional depreciation during the year under consideration. 9. We have considered the rival submissions on either side and also perused the material available on record. Section 32(1)(iia) reads as follows: 32(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. It simply says that the assessee is eligible for additional depreciation equal to 20% of the cost of the machinery provided the machinery or plant is acquired and installed after 31-03-2005. Proviso to section 32(1)(iia) says that if the machinery was acquired by the assessing during the previous year and has put to use for the purpose of business less than 180 days, the deduction shall be restricted to 50% of the amount calculated at the prescribed rate. Therefore, if the machinery is put to use in any particular year, the assessee is entitled for 50% of the prescribed rate of additional depreciation. The Income-tax Act is silent about the allowance of the balance 10% additional depreciation in the subsequent year. Taking advantage of this position, the assessee now claims that the year in which the machinery was put to use the assessee is entitled for 50% additional depreciation since the machinery was put to use for less than 180 days and the balance 50% shall be allowed in the next year since the eligibility of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(1)(ii) of the Act. 12. This issue was consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as he had purchased the new machinery and plant in full but it is restricted to 50% in that particular year on account of period usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50% will not be allowed in succeeding year. The extra depreciation allowable u/s 32(1)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of machinery and plant . In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit. We allow ground no.2 of the assessee's appeal. Since we have decided ground no.2 in favour of assessee, there is no need to decide the alternate claim raised in ground no.3. The same is dismissed. 13. This issue was also considered by another bench of this Tribunal at Delhi in SIL Investment Ltd (supra). At page 233 of the TTJ, the Tribunal has observed as follows: 40. There is nothing on record to show that the directions given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansion of such business or setting up of new unit. According to the ld.senior counsel, the assessee engaged in the business of manufacture and sale of automotive tyres. With a view to expand its global foot print and reach, the assessee acquired the shares of Dunlop Tyres International Pty. Limited (DTIPL hereinafter) engaged in the same line of business as that of the assessee through its wholly owned subsidiary of Apollo Mauritius Holdings Limited (AMHPL) and Apollo South Africa Holdings (Proprietory) Ltd. The shares were issued to Qualified Institutional Buyers for repayment of bridge loan raised for acquisition of Dunlop Tyres International Ltd, South Africa through advancing loans to AMHPL. The ld.senior counsel further submitted that in the context of globalization and liberalization the acquisition of shares of DTIPL engaged in the same line of business as that of the assessee should be regarded as expansion of the assessee's undertaking. Therefore, the expenditure incurred for acquiring the shares of DTIPL has to be amortised u/s 35D of the Act. 17. On the contrary, Shri M. Anil Kumar, the ld.DR submitted that the assessee claimed expenditure of ₹ 1,29,71,451 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly, the orders of the lower authorities are set aside and the disallowance of ₹ 1,29,71,451 is remitted back to the file of the assessing officer. The assessing officer shall reconsider the issue afresh after considering the contentions of the assessee that the expenditure was incurred to expand its business globally by acquiring a company which is doing a similar business as that of the assessee. We make it clear that we are not expressing any opinion on merit. It is for the assessing officer to examine the issue independently on merit and take a decision in accordance with law after giving a reasonable opportunity to the assessee. 19. The next issue arises for consideration is disallowance of investment written off in the shares of Gujarat Perstop Electroniks Ltd. 20. Shri Sanjay Vohra, the ld.senior counsel for the assessee submitted that the assessee invested a sum of ₹ 5.18 crores by acquiring 51.8 lakhs shares of Gujarat Perstop Electroniks Ltd, a company jointly promoted by the assessee and Gujarat Industrial Investment Corporation. According to the ld.representative, Gujarat Perstop Electroniks Ltd was declared as a sick company by the BIFR. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of this Tribunal in assessee's own case for the assessment year 2002-03, the ld.DR submitted that no doubt, this Tribunal examined the issue in 2002-03 and found that 90% of the investment made by the assessee which was written off during that period has to be allowed as business loss u/s 28 r.w.s. 37(1) of the Act. The DRP and the assessing officer apparently not followed the order of this Tribunal since the department has already filed an appeal before the High Court against the order of this Tribunal and to keep the issue alive, the disallowance was made as it was made for the assessment year 2002-03. 22. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the order of this Tribunal in assessee's own case for the assessment year 2002-03. The admitted facts of the case is that the assessee invested a sum of ₹ 5.18 crores for acquiring the shares of Gujarat Perstop Electroniks Ltd which was jointly promoted by the assessee and Gujarat Industrial Investment Corporation. It is not in dispute that Gujarat Perstop Electroniks Ltd is not in the business of manufacture and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, Apollo Mauritius Holdings Co Ltd carrying interest at the rate of 7.5%. The loan was advanced for acquiring 100% controlling interest in DTIPL, South Africa. The Mauritius subsidiary advanced the said loan to Apollo, South Africa, which ultimately acquired the entire share capital of DTIPL, South Africa on 21-04-2006. According to the ld.senior counsel, the object and purpose of advancing loan to Apollo Mauritius Holdings Co Ltd was to facilitate the subsidiary company to acquire a similarly placed tyre manufacturing company in South Africa which offers a comprehensive range of radial products under the world renowned brand. The ld. senior counsel further submitted that the object of advancing the loan was also intended to enhance the efficiency of the assessee's business and give it a sharper competitive edge by creating synergy with tyre business in South Africa. Referring to the annual report of the assessee company for the year under consideration, the ld.senior counsel submitted that the assessee advanced a foreign currency loan to Mauritius subsidiary on commercial expediency. According to the ld.senior counsel, after acquiring the South African company through its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital asset resulted in loss, therefore, it is a capital loss, hence, it cannot be allowed. 25. According to the ld.senior counsel, the intention of the assessee at the time of advancing the loan was to acquire control over DTIPL, South Africa with the intention to expand its global reach and to access know how, skills owned by DTIPL. Therefore, the acquisition of DTIPL was in the larger interest of the business of the assessee company. As a consequence of devaluation of the Indian rupee, the assessee has suffered loss. The ld.senior counsel pointed out that the assessee borrowed the loan for the purpose of business and the same was advanced to Mauritius subsidiary company and the interest on the loan was claimed as a deduction and allowed by the assessing officer u/s 36(1)(iii) of the Act. The ld.senior counsel placed his reliance on the judgment of the Apex Court in the case of S.A. Builders vs CIT 288 ITR 1 (SC). The ld.senior counsel has also placed reliance on the judgment of the Karnataka High Court in CIT vs Anand Technology Resource Park (P) Ltd 202 Taxman 654 (Kar). The ld.senior counsel for the assessee has also placed reliance on various judgments of the variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e suffered by the assessee is in the capital field. The ld.DR further pointed out that conversion of loan into preferential shares amounts to liquidation of loan and it cannot be construed as loss suffered in the course of business activity. Therefore, according to the ld.DR, the loss suffered by the assessee has to be treated as capital loss, hence, it cannot be allowed. 28. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee borrowed loan and advanced the same as loan to Mauritius subsidiary in foreign currency. Subsequently, the loan advanced was converted into preferential shares. The valuation of the preferential share in Indian rupee was recorded in the books of account and the difference between the value of preference share in Indian rupee and South African Rand was shown as business loss. Admittedly, the assessee is not in the business of money lending. The assessee is in the business of manufacturing tyres. For the purpose of expanding its capital base and the profit making apparatus, the assesee advanced loan to Mauritius subsidiary company for the purpose of acquiring a controlling intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Pvt Ltd. Apollo (Mauritius) Holding Pvt Ltd, in turn, flouted another company in South Africa called Apollo (South Africa) Holding Pvt Ltd. The assessee company gave a loan of 314 million Rands to Mauritious subsidiary company, which in turn, gave loan to South African subsidiary company for the purpose of acquiring Dunlop Tyres International (proprietory) Ltd. Therefore, the purpose of granting loan is to acquire a company in South Africa. It is an admitted fact that South Africa has two manufacturing units of Dunlop Tyres International (proprietory) Ltd and has wide range of distributorship networking for sales. In order to safeguard itself from foreign exchange rate fluctuation, the assessee entered into a forward contract with Citi Bank. However, before the due date, i.e. 14-03-2006, the assessee had to settle the forward contract and on that account has suffered a loss of ₹ 5,09,01,000. The question arises for consideration is - whether loss suffered by the assessee in settling the forward contract before the due date is a capital loss or a revenue loss? It is well settled principle of law that the expenditure incurred by the assessee in the process of earning of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the course of earning of profit. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly the order of CIT(A) on this issue is confirmed. 30. Furthermore, the assessee himself claiming the share issue expenses as capital expenditure and amortization u/s 35D of the Act. The Special Bench of this Tribunal at Delhi in the assessee's own case reported at 264 ITR (AT) 1 (Del)(SB) has found similar transaction as capital in nature. 31. We have carefully gone through the judgment of the Apex Court in the case of S.A. Builders (supra) and other judgments of various High Courts. No doubt, the assessing officer allowed the interest on the borrowed funds as business expenditure u/s 37(1) of the Act. By taking a clue from this, the ld.senior counsel for the assessee claims that the loss has also to be allowed as revenue loss. We are unable to accept the contention of the ld.senior counsel for the assessee. When the assessee borrowed loan either for capital investment or for working capital, the borrowal is for the purpose of business, therefore, the interest paid on such loan has to be allowed as revenue expenditure. The Apex Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2006-07 that an identical issue came up before this Tribunal in ITA Nos 31 74/Coch/2010. The copy of the order is placed at page 386 of the paper book. This Tribunal found that the assessee is not entitled for depreciation on the Gurgaon office premises. 35. Having heard the ld.senior counsel for the assessee and the ld.DR we find that this Tribunal had an occasion to consider this issue for the assessment year 2006-07. By following its earlier order for the assessment years 2001-02, 2002-03, 2004-05 and 2004-05 this Tribunal found that the CIT(A) was not justified in allowing the claim of the assessee with regard to depreciation. In view of the above decision of the Tribunal in the assessee's own case for the very same property disallowing the depreciation we do not see any reason to interfere with the order of the lower authority. Accordingly, the same is confirmed. 36. The next ground of appeal is in respect of addition made by the assessing officer on account of interest received on the amount advanced to associated enterprise in Mauritius, viz. Apollo Mauritius Holdings Ltd and on account of reimbursement of expenses received from Dunlop Tyres International Pt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 7,07,13,227. The ld.senior counsel for the assessee submitted that the loan advanced to Mauritian entity was in foreign currency, therefore, the same has to be benchmarked applying LIBOR. For this proposition, the ld.senior counsel placed his reliance on the following decisions: Siva Industries Holdings Ltd vs ACIT ITA No.2148/Mds/2148 Tata Autocomp Systems Ltd vs ACIT ITA No.7354/Mum/2011 Four Soft Lgd vs DCIT 142 TTJ 358 DCIT vs Tech Mahindra Ltd 46 SOT 141 Perot System TSI India Pvt Ltd vs DCIT 130 TTJ 685 (Del) Cotton Naturals (I) Pvt Ltd vs DCIT ITA No.5855/Del/2012 40. The ld.senior counsel for the assessee further pointed out that the average cost of the funds available with the assessee is at 7.25%. Therefore, charging of interest at 7.5% on the loan advanced to Mauritian subsidiary was at arm's length price. 41. On the contrary, Shri M Anil Kumar, the ld.DR submitted that in respect of interest received from Mauritian subsidiary, the TPO adopted internal CUP method and accordingly made the adjustment. According to the ld.DR, LIBOR rate has not taken into consideration the risk factor involved in advancing the loan. Therefore, the ave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial principle with regard to international transaction has to be applied. Accordingly, the Tribunal found that the prime lending rate in domestic market has no application and international market rate fixed by LIBOR would come into play. Accordingly, the Tribunal found that LIBOR should be applied. 44. We have also carefully gone through the decision in Tata Autocomp Systems Ltd (supra). The Mumbai Bench of this Tribunal found that loan extended to associate concern come within the ambit of international transaction. The question of rate of interest on the borrowings of loan is an integral part of the arm's length price determination. The Tribunal, after considering the instructions issued by RBI in respect of export credit to exporters on internationally competitive rate under the scheme of pre- shipment credit in foreign exchange and re-discounting of export bills abroad has permitted the banks to fix the rate of interest with reference to ruling LIBOR or LIBOR EURIBOR. Accordingly, the Tribunal found that there is justification on the part of the assessee to adopt EURIBOR rate in determining the arms' length price on the loan advanced to associate enterprise. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey cannot take a different view. We heard Shri M Anil Kumar, the ld.DR also. 48. Admittedly, the very same issue came before this Tribunal for the assessment year 2005-06 in the assessee's own case in ITA No.729/Coch/2008. This Tribunal, by following its earlier order for the assessment year 2002-03 found that diesel power generation unit for captive consumption is also eligible for deduction u/s 80IA of the Act. In view of the order of this Tribunal, the lower authorities are not justified in rejecting the claim of the assessee. Accordingly, the order of the assessing officer is set aside and the assessing officer is directed to allow deduction u/s 80IA of the Act in respect of captive power generation by using diesel power generation unit. However, in respect of gas turbine power generation unit, the issue was remanded back to the file of the assessing officer since the same was raised before this Tribunal as an additional ground. Therefore, for the year under consideration also, we remand back the matter to the file of the assessing officer for reconsideration on merit. 49. The next ground arising for consideration is additional deduction of 50% expenditure on in-house ..... 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