IT:50% of additional depreciation allowable in 1st year and balance in next year on usage of asset for less than 180 days

[Nitesh More]

IT/ILT : In terms of section 32(1)(iia), there is no restriction on
assessee to carry forward additional depreciation and, thus, where only 50
per cent of additional depreciation is allowed in year of purchase of
machinery as it was put to use for lass than 180 days during said year,
balance 50 per cent of additional depreciation can be claimed in subsequent
assessment year

IT/ILT : Where assessee gave loan to its subsidiary company located abroad
to acquire another foreign company, in view of fact that at time of
conversion of loan into cumulative redeemable preferential shares, there
was fall in value of loan due to difference in foreign exchange conversion
rate, said loss being in course of acquiring a capital asset, it was to be
treated as capital loss not eligible for deduction

IT/ILT: Where assessee advanced loan to its AE located abroad, in view of
order passed in case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2011]
46 SOT 112 (URO)/11 taxmann.com 404 (Chennai)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000064119&source=link>,
Assessing Officer was to be directed to adopt LIBOR method of rate of
interest for purpose of determining ALP of loan transaction in question

■■■

[2014] 45 taxmann.com 337 (Cochin - Trib.)

IN THE ITAT COCHIN BENCH

Apollo Tyres Ltd.

v.

Assistant Commissioner of Income-tax, Circle -1, Range - 1, Kochi*
<http://www.taxmann.com/fileopennew.aspx?Id=101010000000090373&mode=home&Page=CIRNO#fn1>
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER

IT APPEAL NO. 616 (COCH.) OF 2011
[ASSESSMENT YEAR 2007-08]

DECEMBER 20, 2013

I. Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation
of arm’s length price [Comparables and adjustments] - Assessment year
2007-08 - During relevant year, assessee advanced loan to its AE located in
Mauritius carrying interest at rate of 7.5 per cent per annum - In transfer
pricing study, assessee benchmarked international transaction using LIBOR -
Six months average US $ LIBOR rate for period April, 2006 to March, 2007
came to 5.39 per annum - Since, assessee actually charged 7.5 per cent
which was higher than comparable uncontrolled price of six months US $
LIBOR, transaction of advancement of loan was claimed to be at arm's length
price - TPO by adopting interest rate taken earlier for advancing similar
loans to associate enterprises, made certain adjustment - DRP confirmed
said adjustment - Whether in view of order passed by Chandigarh Bench of
this Tribunal in Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 46
SOT 112 (URO)/11 taxmann.com 404 (Chennai)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000064119&source=link>
and
Mumbai Bench in Tata Autocomp Systems Ltd. v. Asstt. CIT [2012] 52 SOT
48/21 taxmann.com 6 (Mum.)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000075957&source=link>,
impugned order of lower authorities was to be set aside and Assessing
Officer was to be directed to consider LIBOR method of rate of interest for
purpose of determining arm's length price of transaction in question -
Held, yes [Para 45] [In favour of assessee]

II. Section 32 of the Income-tax Act, 1961 - Depreciation - Additional
depreciation (Carry forward of additional depreciation) - Assessment year
2007-08 - Whether in terms of section 32(1)(iia), there is no restriction
on assessee to carry forward additional depreciation and, thus, where only
50 per cent of additional depreciation is allowed in year of purchase of
machinery as it was put to use for less than 180 days during said year,
balance 50 per cent of additional depreciation can be claimed in subsequent
assessment year - Held, yes [Para 12] [In favour of assessee]

III. Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions -
Allowable as (Foreign exchange fluctuation loss) - Assessment year 2007-08
- Assessee-company advanced foreign currency loan in Indian rupees to its
wholly subsidiary company, 'A', Mauritius, for acquiring entire share
capital of a South Africa based company - Subsequently, 'A', Mauritius
converted loan advanced by assessee into preference shares - However, at
time of conversion of loan into cumulative redeemable preferential shares,
due to decline in value of Rands, loan amount declined - Assessee claimed
that loss was incurred due to difference in foreign exchange conversion
rate, and, thus, it was to be allowed as business loss - Revenue
authorities rejected assessee's claim - Whether since loss in question was
suffered in course of acquiring a capital asset for expansion of profit
earning apparatus, it was to be treated as capital loss which could not be
allowed as deduction– Held, yes [Para 32] [In favour of revenue]

FACTS-II


■ The assessee claimed additional depreciation in respect of new machinery
and plant acquired after 30-9-2005. ■ The Assessing Officer allowed 10 per
cent of the additional depreciation for the assessment year 2006-07. The
assessee claimed the remaining 10 per cent of the depreciation during the
year under consideration. ■ The Assessing Officer rejected the claim of
the assessee on the ground that there was no provision for carry forward of
any additional depreciation. ■ The DRP confirmed order of Assessing
Officer. ■ On appeal:

HELD-II


■ A bare reading of section 32(1)(iia) clearly says that in case a new
machinery or plant was acquired and installed after 31-3-2005 by an
assessee, who is engaged in the business of manufacture or production of
article or thing, then, a sum equal to 20 per cent of the actual cost of
the machinery and plant shall be allowed as a deduction. ■ It is not in
dispute that the assessee has acquired and installed the machinery after
31-3-2005. It is also not in dispute that the assessee is engaged in the
manufacture of article or thing. Therefore, the assessee is eligible for
additional depreciation which is equivalent to 20 per cent of the actual
cost of such machinery. The dispute is the year in which the depreciation
has to be allowed. ■ The assessee has already claimed 10 per cent of the
depreciation in the earlier assessment year since the machinery was used
for less than 180 days and the balance 10 per cent was claimed in the year
under consideration. ■ Section 32(1)(iia) does not say about the year in
which the additional depreciation has to be allowed. It simply says that
the assessee is eligible for additional depreciation equal to 20 per cent
of the cost of the machinery provided the machinery or plant is acquired
and installed after 31-3-2005. ■ Proviso to section 32(1)(iia) says that
if the machinery was acquired by the assessee 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 per cent 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 per cent of the prescribed
rate of additional depreciation. The Act is silent about the allowance of
the balance 10 per cent 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 per cent
additional depreciation since the machinery was put to use for less than
180 days and the balance 50 per cent shall be allowed in the next year
since the eligibility of the assessee for claiming 20 per cent of the
additional depreciation cannot be denied by invoking second proviso to
section 32(1)(ii). [Para 11] ■ This issue was considered by the Delhi
Bench of this Tribunal in the case of *Dy. CIT* v. *Cosmo Films Ltd. *[2012]
139 ITD 628/24 taxmann.com 189
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000068396&source=link>.
The revenue has taken a similar ground as taken before this Tribunal that
the assessee cannot carry forward the additional depreciation to be allowed
in the subsequent assessment year. ■ The Delhi Bench of this Tribunal
after considering the provisions of section 32(1)(iia) and proviso to
section 32(1)(ii) found that when there is no restriction in the Act to
deny the benefit of balance 50 per cent, the assessee is entitled for the
balance, additional depreciation in the subsequent assessment year. [Para
12] ■ A similar view was taken by Mumbai Bench of this Tribunal in *MITC
Rolling Mills (P.) Ltd.* v. *Asstt. CIT* [IT Appeal No. 2789 (Mum.) of
2012, dated 13-5-2013]. In view of the above decisions of the co-ordinate
benches of this Tribunal on identical set of facts, it is opined that the
balance 50 per cent of the depreciation has to be allowed in the subsequent
year, therefore, the orders of the lower authorities on this issue are set
aside and the Assessing Officer is directed to allow the claim of balance
50 per cent additional depreciation in the year under consideration. [Para
14]

FACTS-III


■ The assessee-company advanced foreign currency loan in Indian rupees to
its wholly subsidiary company, 'A', Mauritius, carrying interest at the
rate of 7.5 per cent. ■ The loan was advanced for acquiring 100 per cent
controlling interest in DTIPL, South Africa. The Mauritius subsidiary
advanced the said loan to 'AP', South Africa, which ultimately acquired the
entire share capital of DTIPL, South Africa. ■ It was undisputed that 'A'
Mauritius had converted the above said loan advanced by the assessee into
non-cumulative redeemable preferential shares after getting the consent of
the assessee. ■ However, at the time of conversion of the loan into
cumulative redeemable preferential shares, due to decline in the value of
the Rands, the loan amount declined. ■ The assessee claimed that since
said loss was incurred mainly due to difference in the foreign exchange
conversion rate, it was to be allowed as business loss. ■ The assessee's
claim was rejected on the ground that it was the acquisition of the capital
asset which resulted in loss, therefore, it was a capital loss which could
not be allowed as deduction. ■ On appeal:

HELD-III


■ 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 assessee
advanced loan to Mauritius based subsidiary company for the purpose of
acquiring a controlling interest in the South African company. ■ It is an
admitted fact that the assessee acquired enduring benefit due to expansion
of its business in South Africa. The assessee utilized the marketing
network of the South African company. Due to centralized purchase, the cost
of raw material has considerably lowered down and the assessee was able to
market its product on competitive rate. The assessee was able to reduce the
manufacturing cost due to transfer of technical skill acquired from South
African company. ■ Therefore, the assessee obtained enduring benefit in
the capital field. The assessee also acquired 100 per cent controlling
interest in the South African company. Therefore, it is obvious that the
loan was advanced by the assessee for acquiring the South African company,
which is undoubtedly a capital asset. In other words, the loan advanced by
the assessee was converted into an investment. [Para 28] ■ Thus, the
assessee advanced the so-called loan for the purpose of acquiring
controlling interest in the South African Company through its Mauritius
subsidiary company which is a capital investment. Therefore, the loss, if
any, suffered has to be treated as capital loss and it cannot be allowed as
revenue loss. [Para 31] ■ It is well settled principles of law 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 earning profit. The loss is suffered in the course of
acquiring a capital asset for expansion of the profit earning
apparatus. ■ Therefore,
the Assessing Officer has rightly found that there is no loss suffered by
the assessee in conversion of loan into preferential shares of the
Mauritius subsidiary company and the loss shown is only a book loss. ■ Even
assuming for the arguments' sake, it has to be treated as a loss, then, the
loss is in the capital field, and therefore, it cannot be allowed as loss
while computing total income. Therefore, there is no reason to interfere
with the orders of lower authorities. Accordingly, the same is confirmed.
[Para 32]

CASES REFERRED TO



*Dy. CIT* v. *Cosmo Films Ltd. *[2012] 139 ITD 628/24 taxmann.com 189
(Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000068396&source=link>
(para
7), *Asstt. CIT* v.*SIL Investment Ltd. *[2012] 54 SOT 54/26 taxmann.com 78
(Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000068027&source=link>
(para
7), *MITC Rolling Mills (P.) Ltd*. v. *Asstt. CIT* [IT Appeal No. 2789
(Mum.) of 2012, dated 13-5-2013] (para 7), *Divis Laboratories Ltd.* v. *Dy.
CIT* [IT Appeal No.11/Hyd/2012, dated 12-7-2013] (para 7), *S.A. Builders
Ltd.* v.*CIT**(Appeals) *[2007] 288 ITR 1/158 Taxman 74 (SC)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000080939&source=link>
(para
25), *CIT* v. *Anand Technology Resource Park (P.) Ltd. *[2011] 202 Taxman
654/15 taxmann.com 4 (Kar.)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000036076&source=link>
(para
25), *CIT* v. *Woodward Governor India (P.) Ltd. *[2007] 294 ITR 451/162
Taxman 60 (Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000027750&source=link>
(para
26),* CIT* v. *Woodward Governor India (P.) Ltd. *[2009] 312 ITR 254/179
Taxman 326 (SC)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000080725&source=link>
(para
26), *Siva Industries & Holdings Ltd. *v*. Asstt. CIT *[2011] 46 SOT 112
(URO)/11 taxmann.com 404 (Chennai)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000064119&source=link>
(para
39), *Tata Autocomp Systems** Ltd.*v*. Asstt. CIT *[2012] 52 SOT 48/21
taxmann.com 6 (Mum.)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000075957&source=link>
(para
39),* Four Soft Ltd.* v. *Dy. CIT *[2011] 142 TTJ 358 (Hyd.) (para 39), *Dy.
CIT* v. *Tech Mahindra Ltd*. [2011] 46 SOT 141 (URO)/12 taxmann.com 132
(Mum.)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000075566&source=link>
(para
39), *Perot Systems TSI (India)(P.) Ltd.* v. *Dy. CIT *[2010] 37 SOT 358
(Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000067051&source=link>
(para
39) and *Cotton Naturals (I) (P.) Ltd.* v. *Dy. CIT *[2013] 32 taxmann.com
219 (Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000084734&source=link>
(para
39).

*Ajay Vohra* *for the Appellant. **M. Anil Kumar* and *Smt. S.
Vijayaprabha** for
the Respondent.*

ORDER



*N.R.S. Ganesan, Judicial Member - *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 Rs. 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 depreciation. According to
the ld. senior counsel, this is not a carry forward of additional
depreciation; but a claim made by the assessee during the year under
consideration. Referring to provisions of section 32(1)(iia) of the Act,
the ld. senior counsel submitted that in case of any machinery or plant
acquired and installed after 31-03-2005 the assessee is entitled for a
further sum equal to 20% of the actual cost of the plant & machinery
installed as additional depreciation. This section 32(1)(iia) does not say
the year in which the additional depreciation has to be allowed. It simply
says that the assessee, who is engaged in the business of manufacture or
production of articles or thing has acquired and installed machinery and
plant after 31-03-2005 is eligible for additional depreciation of a further
sum equal to 20% of the actual cost. The further sum of 20% of the actual
cost may be allowed either in the year in which the plant or machinery was
acquired and installed or in the subsequent years. So long as there is no
restriction in respect of the year in which the additional depreciation is
to be allowed, the assessing officer cannot reject the claim of the
assessee for the year under consideration.

*4.* The ld. senior counsel further pointed out that second proviso to
section 32(1)(ii) of the Act restricts the depreciation to 50% in case the
machinery and plant was put to use for the purpose of business or
profession for a period less than 180 days. Therefore, according to the ld.
representative, when the plant or machinery is used for less than 180 days,
the assessee is entitled for 50% of the additional depreciation and the
remaining 50% can be claimed in the subsequent year since there is no
restriction to claim the additional depreciation in the subsequent
assessment year. The ld. senior counsel further submitted that it is not a
case of carry forward of additional depreciation for want of sufficient
profit. According to the ld. senior counsel, the assessee has sufficient
profit to absorb the entire depreciation for the first year in which the
depreciation was claimed. However, in view of second proviso to section
32(1)(ii), the assessing officer has allowed only 10% of the depreciation
being 50% of the total claim. In the absence of any provision to prohibit
the assessee from claiming remaining depreciation in the next assessment
year, the claim of depreciation 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 the Act. According to the ld.
senior counsel, even if there is any contradiction between sections
32(1)(iia) and proviso to section 32(1)(ii), it has to be reconciled so as
to give harmonious effect to the legislative intent. The benefits conferred
on the assessee by way of incentive provision cannot be taken away by
adopting an implied meaning to second proviso to section 32(1)(ii) of the
Act. Since the second proviso to section 32(1)(ii) does not expressly
prohibit the allowance of the balance 50% depreciation in the subsequent
year, proviso to section 32(1)(ii) shall not be interpreted to mean that it
impliedly restrict the additional depreciation to be allowed in the
subsequent assessment year. According to the ld. senior counsel, when the
main provision which allows depreciation @20% and does not prescribe any
particular year in which it has to be allowed, the intention of the
legislature is to allow entire additional depreciation @20%. The second
proviso to section 32(1)(ii) is to mean that 10% should be allowed in the
year in which the machinery is acquired and installed and the balance 10%
has to be impliedly allowed in the subsequent year.

*7.* The ld. senior counsel placed his reliance on the decision of the
Delhi Bench of this Tribunal in the case of*Dy. CIT* v *Cosmo Films Ltd *[2012]
139 ITD 628/24 taxmann.com 189
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000068396&source=link>
and
in the case of *Asstt. CIT* v.*SIL Investment Ltd. *[2012] 54 SOT 54/26
taxmann.com 78 (Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000068027&source=link>.
Further reliance was placed on the decision of the Mumbai Bench of this
Tribunal in *MITC Rolling Mills (P.) Ltd*. v. *Asstt. CIT* IT Appeal
No.,2789/Mum/2012, dated 13-5-2013 copy of which is available at pages 26
to 28 of the paper book. The ld. senior counsel has also relied upon the
unreported decision of the Hyderabad Bench of this Tribunal in the
case of *Divis
Laboratories Ltd* v. *Dy. CIT* IT Appeal No.11/Hyd/2012, dated 12-7-2013
copy of which is available at pages 29 to 41 of the paper book.

*8.* On the contrary, Shri M Anil Kumar, the ld. DR submitted that the
assessee is entitled for additional depreciation u/s 32(1)(iia) of the Act
in respect of new machinery and plant . The depreciation has to be granted
in the year in which the machinery was put to use. If the machinery was put
to use for less than 180 days, then, the assessee is entitled only for 50%
of the additional depreciation i.e. 10%. In fact, 10% of the depreciation
was allowed in the year in which the machinery was put to use. It is not
the case of the assessee that the assessee had no sufficient 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
under clause (ii):

Provided that no deduction shall be allowed in respect of –
(A) Any machinery or plant which, before its installation by the assessee,
was used either within or outside India by any other person; or (B) Any
machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest-house; or
(C) Any office appliances or road transport vehicles; or (D) Any
machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the
income chargeable under the head "Profits and gains of business or
profession" of any one previous year."

*10. *We have also carefully gone through the Second Proviso to section
32(1)(ii) of the Act, which reads as follows:

"Provided further that where an asset referred to clause (i) or clause (ii)
or clause (iia), as the case may be, is acquired by the assessee during the
previous year and is put to use for the purpose of business or profession
for a period of less than one hundred and eighty days in that previous
year, the deduction under this sub-section in respect of such asset shall
be restricted to fifty per cent of the amount calculated at the percentage
prescribed for an asset under clause (i) or clause (ii) or clause (iia) as
the case may be."

*11.* A bare reading of this section 32(1)(iia) clearly says that in case a
new machinery or plant was acquired and installed after 31-03-2005 by an
assessee, who is engaged in the business of manufacture or produce of
article or thing, then, a sum equal to 20% of the actual cost of the
machinery and plant shall be allowed as a deduction. It is not in dispute
that the assessee has acquired and installed the machinery after 31-03-
2005. It is also not in dispute that the assessee is engaged in the
manufacture of article or thing. Therefore, the assessee is eligible for
additional depreciation which is equivalent to 20% of the actual cost of
such machinery. The dispute is the year in which the depreciation has to be
allowed. The assessee has already claimed 10% of the depreciation in the
earlier assessment year since the machinery was used for less than 180 days
and claiming the balance 10% in the year under consideration. Section
32(1)(iia) does not say that the year in which the additional depreciation
has to be allowed. 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 considered by the Delhi Bench of this Tribunal in the
case of *Cosmo Films Ltd *(*supra*). The revenue has taken a similar ground
as taken before this Tribunal that the assessee cannot carry forward the
additional depreciation to be allowed in the subsequent assessment year.
The Delhi Bench of this Tribunal after considering the provisions of
section 32(1)(iia) and proviso to section 321)(ii) of the Act found that
when there is no restriction in the Act to deny the benefit of balance 50%,
the assessee is entitled for the balance additional depreciation in the
subsequent assessment year. In fact, the Delhi Bench of this Tribunal has
observed as follows at pages 641 and 642 of the ITD:

"……Thus, the intention was not to deny the benefit to the assessees who
have acquired or installed new machinery or plant. The second proviso to
section 32(1)(ii) restricts the allowances only to 50% where the assets
have been acquired and put to use for a period less than 180 days in the
year of acquisition. This restriction is only on the basis of period of
use. There I no restriction that balance of one time incentive in the form
of additional sum of depreciation shall not be available in the subsequent
year. Section 32(2) provides for a carry forward set up of unabsorbed
depreciation. This additional benefit in the form of additional allowance
u/s 32(1)(iia) is one time benefit to encourage the industrialization and
in view of the decision of Hon'ble Supreme Court in the case of *Bajaj
Tempo Ltd.*v. *CIT *[1992] 196 ITR 188
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000080472&source=link>,
the provisions related to it have to be construed reasonably, liberally and
purposive to make the provision meaningful while granting the additional
allowance. This additional benefit is to give impetus to industrialization
and the basic intention and purpose of these provisions can be reasonably
and liberally held that the assessee deserves to get the benefit in full
when there is no restriction in the statute to deny the benefit of balance
of 50% when the new machinery and plant were acquired and used for less
than 180 days. One time benefit extended to assessee has been earned in the
year of acquisition of new machinery and plant . It has been calculated
@15% but restricted to 50% only on account of usage of these plant &
machinery in the year of acquisition. In section 32(1)(iia), the expression
used I "shall be allowed". Thus, the assessee had earned the benefit as
soon 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 the
learned CIT(A) are not proper. The eligibility for deduction of additional
depreciation stands admitted, since 50 per cent thereof had already been
allowed by the AO in the asst.yr.2005-06, i.e. the immediately preceding
assessment year. Therefore, obviously, the balance 50 per cent of the
deduction is to be allowed in the current year, i.e. asst. yr. 2006-07. The
learned CIT(A) has merely directed the verification of the contentions of
the assessee and to allow the balance additional depreciation after such
factual verification. Accordingly, finding no merit therein, ground No.3
raised by the Department is rejected."

*14.* A similar view was taken by Mumbai Bench of this Tribunal in *MITC
Rolling Mills (P.) Ltd.* (*supra*). In view of the above decisions of the
co-ordinate benches of this Tribunal on identical set of facts this
Tribunal is of the considered opinion that the balance 50% of the
depreciation has to be allowed in the subsequent year, therefore, the
orders of the lower authorities on this issue are set side and the
assessing officer is directed to allow the claim of balance 50% additional
depreciation in the year under consideration.

*15.* The next ground of appeal is with regard to share issue expenditure
incurred in respect of equity shares and the fee paid to Registrar of
Companies for increasing the authorised share capital of the company.

*16.* Shri Ajay Vohra, the ld. senior counsel submitted that the assessee
has incurred expenditure to the extent of Rs.6,36,07,257 on issues of
shares to Qualified Institutional Buyers and further expenditure of
Rs.12,50,000 on fees paid to Registrar of Companies for increasing the
authorized share capital. According to the ld. senior counsel, the assessee
claimed deduction of Rs.1,29,71,451 by way of amortization of aggregate
expenditure of Rs.6,48,71,451 u/s 35D of the Act. However, the assessing
officer / DRP (DRP, hereinafter) disallowed the claim of the assessee on
the ground that benefit under that section is available only in respect of
setting up of a new industrial unit and not for meeting expenditure for
expansion of the business. Referring to section 35D(1), the ld. senior
counsel for the assessee submitted that section 35D(1) allows deduction in
connection with the expenditure specified in sub section (2) of that
section incurred before commencement of business or at the time of
expansion 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 Rs.1,29,71,451 u/s 35D of the Act.
According to the ld. DR, section 35D is available only in respect of
initial setting up or in connection with setting up of a new industrial
undertaking and not for meeting the expenditure incurred for expansion of
business. According to the ld. DR, the assessee claimed before the
assessing officer and DRP that the expenditure was incurred during the
course of business for the purpose of working capital of the company. Since
the assessee claimed before the lower authorities that the expenditure was
incurred in the course of business and funds were raised for meeting the
working capital of the company, according to the ld. DR, section 35D has no
application at all.

*18.* We have considered the rival submissions on either side and also
perused the material available on record. The assessee now claims that
expenditure was incurred for issue of shares to Qualified Institutional
Buyers and fees paid to Registrar of Companies. Therefore, it has to be
amortised for five years and 1/5th of the amount shall be allowed during
the year under consideration. A bare reading of the draft assessment order,
the objection filed by the assessee before the assessing officer and the
decision of the DRP clearly shows that the assessee claimed that additional
capital was raised for augumentation of the working capital; therefore, it
was in the revenue field. It was also not claimed before the lower
authority that the expenditure was incurred in respect of issue of shares
and fees paid to Registrar of Companies. Therefore, the lower authorities
had no occasion to examine whether the expenditure was in fact incurred for
issue of shares and fees paid to the Registrar of Companies. Since now the
assessee claims that the expenditure was incurred for issue of shares to
the Qualified Institutional Buyers and on fees paid to Registrar of
Companies, this Tribunal is of the considered opinion that the matter needs
to be reconsidered by the assessing officer. The assessing officer shall
re-examine the issue and 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.
Since the assessing officer and the DRP had no occasion to examine the
issue, this Tribunal is of the considered opinion that the matter needs to
be reconsidered. Accordingly, the orders of the lower authorities are set
aside and the disallowance of Rs.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 Rs.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. Therefore, a sum of Rs.4.66 crores being 90% of
the total investment in the equity shares of Gujarat Perstop Electroniks
Ltd was written off by the assessee during the year 2002-03. Referring to
page 399 of the paper book, the ld. senior counsel submitted that in the
Board of Directors meeting held on 26-06-2002 it was decided to write down
90% of the existing equity due to accumulated losses. The balance 10% of
the investment being 51.8 lakhs was written off during the year under
consideration. According to the ld. representative 90% of the investment
was held to be allowable as loss incidental to business by this Tribunal
for the assessment year 2002-03 in ITA No.429/Coch/2006 order dated
08-02-2003. According to the ld. senior counsel for the assessment year
2002-03, this bench of the Tribunal found that the investment in Gujarat
Perstop Electroniks Ltd, though not engaged in the same line of business as
that of the assessee company was for the purpose of business and write off
of 90% of the investment was in the nature of loss incidental to business,
and therefore, allowable deduction in terms of section 28 r.w.s. 37(1) of
the Act. Referring to the order of this Tribunal for the assessment year
2002-03, copy of which is available on page 247 of the paper book, the ld.
representative submitted that in respect of 90% of the amount written off,
the Tribunal allowed the claim of the assessee. Therefore, the remaining
10% now written off during the year under consideration has to be allowed.
According to the ld. representative, this issue is covered by the order of
this Tribunal in favour of the assessee.

*21.* On the contrary, Shri M Anil Kumar, the ld. DR submitted that the
assessee admittedly invested Rs.5.18 crores for acquiring the shares of
Gujarat Perstop Electroniks Ltd, a company jointly promoted by the assessee
and Gujarat Industrial & Investment Corporation. Gujarat Industrial &
Investment Corporation is not in the business of manufacture and sale of
automotive tyres. The expenditure was not incurred in the course of earning
of profit. According to the ld. DR, the shares were acquired with a view to
acquire capital asset for a new business venture. Therefore, the
expenditure incurred by the assessee by way of investment in acquiring 51.8
lakhs shares of Gujarat Perstop Electroniks Ltd is in the course of
acquisition of capital asset. Referring to the 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 Rs.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
sale of automotive tyres. Therefore, the investment made by the assessee to
the extent of Rs.5.18 crores for acquiring the shares of Gujarat Perstop
Electroniks Ltd cannot be in the course of earning of profit or running the
existing business effectively and efficiently. This investment of 5.18
crores was made by the assessee to acquire a new platform / profit earning
apparatus for expanding the scope of its business. Therefore, under normal
circumstances, this should have been treated as capital expenditure. Any
loss incurred in the investment for a capital asset has to be treated as
capital loss. Therefore, we have our own reservation about the correctness
of the decision of the earlier bench of this Tribunal for the assessment
year 2002-03. We are conscious that the decision of the co-ordinate bench
of this Tribunal is binding on the subsequent benches. Even though we have
reservation about the correctness of the decision taken by the earlier
bench, to maintain the judicial discipline, this Tribunal has to follow the
decision taken by the earlier bench of this Tribunal. In view of the
settled principles of law about the binding nature of the decision of the
earlier bench of this Tribunal and the matter is already pending before the
High Court in appeal by the department, we do not find any reason to take a
different view than that of the earlier decision taken by the earlier bench
till the high court pronounces its judgment in the departmental appeal for
the assessment year 2002-03. 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 also may not serve any
purpose. Accordingly, by 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.

*23.* The next ground of appeal is with regard to disallowance of loss to
the extent of Rs.45,58,79,524 on the loan advanced to subsidiary company
which was converted into preference shares.

*24.* Shri Ajay Vohra, the ld. senior counsel for the assessee submitted
that the assessee company advanced foreign currency loan of 314 million
Rands equivalent to 232.92 crores in Indian rupees to its wholly subsidiary
company, 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 Mauritius subsidiary, the assessee was able to acquire
raw materials at low cost due to centralized purchasing. The engineering
and technical support supplemented by skills the transfer through on the
job training, outsourcing the product to capitalize on lower manufacturing
cost. The assessee increased its ability to secure off-shore funding at
more competitive rates. Apart from that the assessee anticipated benefits
in centralized international marketing, global brand positioning, product
range rationalization, etc. The ld. senior counsel further submitted that
on 29-03-2007, the Apollo Mauritius converted the above said loan advanced
by the assessee into non cumulative redeemable preferential shares after
getting the consent of the assessee. However, at the time of conversion of
the loan into cumulative redeemable preferential shares, due to decline in
the value of the Rands, the loan of 314 million Rands which was equivalent
to 232.92 crores had declined by an amount of Rs.45.54 crores. After
conversion of loan into redeemable preferential shares, the value of the
same stood at 187.33 crores.

According to the ld. senior counsel, in the process of conversion of the
loan into redeemable preferential shares and due to decline in value of the
Rands, the assessee suffered a loss of Rs.45.58 crores. The ld. senior
counsel submitted that this loss was incurred mainly due to difference in
the foreign exchange conversion rate. Referring to the note said to be
filed along with the revised return, the ld. senior counsel pointed out
that though in the books of account, preferential share was recognized at
232.92 crores which was the amount originally advanced, the foreign
exchange loss was debited to foreign exchange currency transaction reserve
account. According to the ld. senior counsel, since there was a
constructive repayment of loan advanced by the assessee company the same
was converted into redeemable preferential shares which resulted in actual
foreign exchange loss of Rs.45.58 crores. According to the ld. senior
counsel, the loss suffered by the assessee was not claimed in the original
return; however, the same was claimed in the revised return. The DRP
disallowed the claim of the assessee on the ground that it was a book loss
and not in the nature of business loss. The assessing officer made the
disallowance on the ground that the acquisition of 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* v. *CIT**(Appeals)*[2007] 288 ITR 1/158 Taxman 74 (SC)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000080939&source=link>.
The ld. senior counsel has also placed reliance on the judgment of the
Karnataka High Court in *CIT* v. *Anand Technology Resource Park (P)
Ltd. *[2011]
202 Taxman 654/15 taxmann.com 4 (Kar)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000036076&source=link>.
The ld. senior counsel for the assessee has also placed reliance on various
judgments of the various High Courts wherein similar interest was allowed
on the borrowed funds. Applying the principles laid down by the Supreme
Court and various High Courts on the interest paid on the loan which was
advanced to sister concern, the ld. senior counsel for the assessee
submitted that the loan advanced to Mauritius company for the purpose of
acquiring controlling interest in DTIPL was for business purpose and was
due to commercial expediency, therefore, the loss suffered by the assessee
due to foreign exchange fluctuation has to be allowed as business loss.

*26.* Referring to the judgment of the Delhi High Court in *CIT* v. *Woodward
Governor India (P) Ltd.*[2007] 294 ITR 451/162 Taxman 60
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000027750&source=link>
which
has been approved by the Supreme Court in *CIT* v.*Woodward Governor India
(P.) Ltd. *[2009] 312 ITR 254/179 Taxman 326
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000080725&source=link>,
the ld. senior counsel submitted that the increase in liability due to
increase in the rate of foreign exchange was held to be on the revenue
account, hence, it is allowable as revenue expenditure. Therefore, the loss
suffered by the assessee has to be allowed as revenue expenditure.

*27.* On the contrary, Shri M Anil Kumar, the ld. DR submitted that the
assessee has not claimed loss in the original return, however, the same was
claimed in the revised return. According to the ld. DR, the money was
advanced in foreign currency as a loan to subsidiary company for the
purpose of acquiring controlling interest in DTIPL in South Africa.
Therefore, the loan was advanced for the purpose of acquiring a capital
asset in South Africa. After acquisition of a capital asset, the profit
earning apparatus of the assessee is expanded due to the loan advanced by
the assessee. Indirectly the assessee is acquiring a capital asset through
the subsidiary company. According to the ld. DR, the loan was already
advanced and by a book entry, the assessee is showing loss. In fact,
according to the ld. DR, no material loss has accrued to the assessee. The
ld. DR further submitted that advancing money is not the business of the
assessee. The business of the assessee, admittedly, is manufacturing of
tyre. The ld. DR further pointed out that the loan advanced by the assessee
was claimed to have been converted into preferential share and while
valuing the preferential share, a book loss was shown. According to the ld.
DR, the loan taken by the assessee for the purpose of acquiring capital
asset is in the capital field, therefore, the consequential loss, if any,
said to be 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 interest in the South African company. It is an
admitted fact that the assessee acquired enduring benefit due to expansion
of its business in South Africa. The assessee utilized the marketing net
work of the South African company. Due to centralized purchase, the cost of
raw material has considerably lowered down and the assessee was able to
market its product on competitive rate. The assessee was able to reduce the
manufacturing cost due to transfer of technical skill acquired from South
African company. Therefore, the assessee obtained enduring benefit in the
capital field. The assessee also acquired 100% controlling interest in the
South African company. Therefore, it is obvious that the loan was advanced
by the assessee for acquiring the South African company, which is
undoubtedly a capital asset. In other words, the loan advanced by the
assessee was converted into an investment.

*29.* Now the question arises for consideration is when the value of the
shares of Mauritius subsidiary company was diminished due to reduction in
Indian rupee, whether such a diminution could be allowed as revenue loss?
When the assessee advanced the money for the purpose of acquiring /
expanding the capital asset, the consequential loss, if any, has to be
treated as capital loss. It is not a simple loss due to reduction in Indian
rupee. The assessee admittedly advanced money for the purpose of acquiring
100% controlling interest in the South African company through its
Mauritius subsidiary company. Therefore, in fact, it is an investment. The
so-called loan was advanced in foreign currency. This Tribunal had an
occasion to consider the identical issue in respect of the same loan in the
assessee's own case for the assessment year 2006-07. This Tribunal found
that the so-called loan was advanced for acquiring a capital asset. In
fact, at paragraphs 18 & 19 of the order for assessment year 2006-07 this
Tribunal has observed as follows:

"18. We have considered the rival submissions on either side and also
perused the material available on record. Admittedly, the assessee is in
the business of manufacture and sale of tyre. In order to expand its
business in South Africa, the assessee intended to purchase Dunlop Tyres
International (proprietory) Ltd. For that purpose, as an intermediary
arrangement, a subsidiary company was flouted in Mauritius by name 'Apollo
(Mauritius) Holding 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 Rs.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 profit is a revenue expenditure.
However, if any expenditure was incurred in the process of establishing a
capital asset either by expanding the existing unit or by expanding the
profit making apparatus it has to be treated as capital expenditure.

19. Now, in the above background, we have to see whether acquisition of
tyre manufacturing company along with the distribution network at South
Africa would expand the business and profit making apparatus of the
assessee or not? The assessee, instead of acquiring the company directly,
established a company in Mauritius as 100% subsidiary company and the said
subsidiary company has established another company in South Africa. The
motive and intention behind the establishment and creation of two
intermediary companies is for the purpose of acquiring Dunlop Tyres
International (proprietory) Ltd. The loan in foreign exchange was granted
to achieve the above object of acquiring the company in South Africa. This
Tribunal is of the considered opinion that by acquisition of a company in
South Africa, the manufacturing base and distribution network, in other
words, the capital base of the company, expands considerably and the profit
making apparatus also expanded. Though the company was acquired through a
subsidiary company this Tribunal of the considered opinion that it is only
an arrangement made by the assessee to acquire Dunlop Tyres International
(proprietory) Ltd. In effect, the assessee is holding and controlling the
subsidiary company as well as Dunlop Tyres International (proprietory) Ltd.
This Tribunal is of the considered opinion that the entire arrangements
made by the assessee by establishing two intermidiary subsidy companies
would come to light once the corporate veil is lifted. Therefore, the loss
suffered was in the process of acquisition of Dunlop Tyres International
(proprietory) Ltd in South Africa. In other words, the loss was suffered in
the process of acquisition of a capital asset which expands the
manufacturing facility as well as the profit making apparatus of the
company. Therefore, this Tribunal is of the considered opinion that the
loss suffered by the assessee by settling the forward contract in the
process of acquisition of Dunlop Tyres International (proprietory) Ltd is a
capital loss which cannot be allowed as a revenue loss or as an item of
expenditure. This is not an expenditure incurred in 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 Ltd.*(*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
case of *S.A. Builders* (*supra*) found that advancing the amount borrowed
to the sister concern is also a business purpose and there is a commercial
expediency in advancing the amount. So long as the funds advanced to the
sister concern are used for business purpose of the sister concern and the
amounts by the directors of the sister concern for their personal purpose,
the interest on such loan has not to be allowed as business expenditure. We
are unable to understand how this principle laid down by the Apex Court is
applicable to the facts of the case. Here, the assessee advanced the
so-called loan for the purpose of acquiring controlling interest in the
South African Company through its Mauritius subsidiary company which is a
capital investment. Therefore, the advance of loan is for acquiring a
capital asset or for expansion of its capital base. Therefore, the loss, if
any, suffered has to be treated as capital loss and it cannot be allowed as
revenue loss.

*32.* It is well settled principles of law 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 earning profit. The loss is suffered in the course of acquiring
a capital asset for expansion of the profit earning apparatus. Therefore,
this Tribunal is of the considered opinion that the assessing officer had
rightly found that there is no loss suffered by the assessee in conversion
of loan into preferential shares of the Mauritius subsidiary company and
the loss shown is only a book loss. Even assuming for the arguments' sake,
it has to be treated as a loss, then, this Tribunal is of the considered
opinion that the loss is in the capital field, and therefore, it cannot be
allowed as loss while computing total income. Therefore, this Tribunal do
not find any reason to interfere with the orders of lower authorities.
Accordingly, the same is confirmed.

*33.* The next issue arises for consideration is with regard to
disallowance of depreciation u/s 38(2) of the Act in respect of let out
portion of the corporate office building at Gurgaon.

*34.* We heard Shri Ajay Vohra, the ld.senior counsel for the assessee and
Shri M Anil Kumar, the ld.DR. It is brought to the notice of this bench for
the assessment 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 Pty Ltd (now known as Apollo Tyres Soputh Africa
(Proprietory) Limited) (DTIPL).

*37.* Shri Ajay Vohra, the ld. senior counsel for the assessee submitted
that the assessing officer and the Transfer Pricing Officer made an
addition of Rs.7,24,53,335 on account of interest received on the amount
advanced to associate enterprise in Mauritius and on account of
reimbursement of expenses received from DTIPL. According to the ld. senior
counsel, the assessee advanced a loan of Rs. 314 million Rands equivalent
to 232.92 crores to Apollo Mauritius Holdings Ltd. As per the agreement
with Apollo Mauritius Holding Ltd the loan carried interest @7.5% per
annum. Accordingly, the assessee received interest of Rs.7,07,13,227. In
the transfer pricing study, according to the ld. senior counsel, the
assessee benchmarked the international transaction using LIBOR. The six
months average USD LIBOR rate for the period April, 2006 to March, 2007
comes to 5.39% per annum. However, the assessee actually charged 7.5% which
is higher than the comparable uncontrolled price of six month USD LIBOR.
Therefore, according to the ld.senior counsel, the transaction of
advancement of loan to Mauritius associate concern is at arm's length price.

*38.* The ld. senior counsel for the assessee further submitted that during
the year under consideration the assessee availed and utilized foreign
currency loan from international finance corporation carrying interest
@7.25% to 7.46% per annum. The assessee company had also taken foreign
currency loan from ICICI Bank carrying interest @ 7.24% and 7.05%.
According to the ld. senior counsel, the interest charged by the assessee
is higher than the rate of interest on the foreign currency loan.
Therefore, the transaction between the assessee and Apollo Mauritius
Holdings Ltd is at arm's length price.

*39.* Even otherwise, according to the ld. senior counsel, loan advanced to
Apollo Mauritius Holdings Ltd was financed by way of bridge loan from
various banks in India. The average rate of interest charged by banks in
India on the bridge loan comes to 7.14% per annum which was lower than the
interest rate of 7.5% charged by the assessee on the loan advanced to
Apollo Mauritius Holdings Ltd. According to the ld. senior counsel, the
TPO, applying the rate of 11.35% on the loan taken from GE Capital Services
India made transfer pricing adjustment of Rs.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. *v*. Asstt. CIT *[2011] 46 SOT 112
(URO)/11 taxmann.com 404 (Chennai)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000064119&source=link>

*Tata Autocomp Systems* *Ltd. *v*. Asstt. CIT *[2012] 52 SOT 48/21
taxmann.com 6 (Mum.)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000075957&source=link>

*Four Soft Ltd.* v. *Dy. CIT* [2011] 142 TTJ 358 (Hyd.)

*Dy. CIT* v. *Tech Mahindra Ltd*. [2011] 46 SOT 141 (URO)/12 taxmann.com
132 (Mum.)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000075566&source=link>

*Perot Systems TSI (India)(P.) Ltd* v. *Dy. CIT *[2010] 37 SOT 358 (Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000067051&source=link>

*Cotton Naturals (I) (P.) Ltd* v. *Dy. CIT *[2013] 32 taxmann.com 219
(Delhi)
<http://www.taxmann.com/fileopen.aspx?Page=CASELAWS&id=101010000000084734&source=link>

*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 average six months USD LIBOR
rate for the period April, 2006 to March, 2007 may not be the appropriate
method. In respect of reimbursement of expenses received from Dunlop Tyres
International Pvt Ltd, the assessing officer found that the assessee has
received the money without any interest and the interest cost has been
ignored by the assessee. According to the ld. DR, the TPO, by adopting the
interest rate taken earlier for advancing similar loans to associate
enterprises made adjustment. According to the ld. DR, the DRP, after taking
into consideration the substantial gap between the time of expenditure and
the time of reimbursement confirmed the assessment made by the TPO.

*42.* We have considered the rival submissions on either side and also
perused the material available on record. Admittedly, the assessee advanced
loan to associate enterprise in Mauritius and received interest. The
assessee has also received reimbursement of expenditure from DTIPL. The
question arises for consideration is - whether the assessee has charged
interest at arm's length price in respect of loan advanced to associate
enterprise.

*43.* We have carefully gone through all the decisions referred by the ld.
senior counsel for the assessee. In the case before the Chandigarh Bench of
this Tribunal in *Siva Industries & Holdings Ltd* (*supra*) the assessee
advanced a loan of Rs.50 crores to its subsidiary in Mauritius for making
invest and charged interest @6% per annum. The TPO found that USD
denominated LIBOR could not be considered as a loan was given from India
and the prime lending rate in India has to be taken into consideration. The
department contended before the Tribunal that LIBOR would be applicable if
the assessee advanced loan in foreign currency. However, in the case before
the Chandigarh Bench of this Tribunal, the loan was advanced in Indian
rupee and, therefore, the department contended that prime lending rate in
the domestic market would be applied and not LIBOR rate. The Tribunal after
considering the materials available on record found that the assessee
raised funds by issuing zero per cent optional convertible preferential
issue for advancement of loan to Mauritius subsidiary company. The loan was
given in USD. The assessee was also receiving interest from the associate
enterprise. Since the transaction was an international transaction, the
Tribunal found that commercial 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. In the case on hand also, the loan was advanced in foreign
currency to Mauritius associate concern. The assessee availed loan in
foreign currency to advance loan to the associate concern in Mauritius. The
assessee, in fact, charged interest at 7.5%. The LIBOR rate of interest
during that period is 5.39% per annum. Therefore, the rate of interest
charged by the assessee on the loan advanced to associate enterprise on the
international transaction is more than the LIBOR average rate for the six
months' period during the relevant time.

*45.* Since the co-ordinate benches of this Tribunal at Chandigarh and
Mumbai found that in respect of international transaction, LIBOR would be
more appropriate, this Tribunal is of the considered opinion that the
assessing officer has to adopt LIBOR than the domestic market rate. In the
case before us, the domestic market rate comes nearly to 7.14% to 7.5%.
Therefore, this Tribunal is of the considered opinion that the assessing
officer is not justified in rejecting the LIBOR rate of interest by
determining the arm's length price in respect of loan advanced to associate
enterprise. Accordingly, the orders of the lower authorities are set aside
and the assessing officer is directed to consider LIBOR rate of interest
for the purpose of determining the arm's length price.

*46.* The next issue arises for consideration is deduction u/s 80IA of the
Act in respect of diesel generating sets I and 2 and in respect of gas
turbine power generation unit.

*47.* Shri Ajay Vohra, the ld. senior counsel for the assessee submitted
that the assessing officer by following his own order for the assessment
year 2005-06 rejected the claim of the assessee on the ground that the
power generating unit is not an undertaking by itself. Referring to the
order of this Tribunal for the assessment year 2005-06 in ITA
No.429/Coch/2006, the ld. senior counsel submitted that this Tribunal found
that DG & DT power generating unit for captive consumption is eligible for
deduction u/s 80IA of the Act. Though the order of this Tribunal was
brought to the notice of the assessing officer and DRP, they simply
rejected the claim of the assessee on the ground that the issue has not
reached finality. According to the ld. senior counsel, the order of this
Tribunal for the assessment year 2005-06 is binding on the lower authority
including the DRP, therefore, they 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 research and development u/s 35(2AB) of the Act.

*50.* The ld. senior counsel for the assessee submitted that the very same
issue came up before this Tribunal for the assessment year 2006-07 in ITA
Nos 31 & 74/Coch/2010. This Tribunal found that the assessee failed to make
any claim before the assessing officer, therefore, the matter was restored
to the file of the assessing officer for consideration on merit in respect
of deduction u/s 35(2AB). We heard Shri M Anil Kumar, the ld. DR also.

*51.* As rightly submitted by the ld. senior counsel for the assessee,
deduction u/s 35(2AB) of the Act the issue was remanded back to the file of
the assessing officer as the assessee failed to claim the same before the
assessing officer. For the sake of consistency, the orders of the lower
authorities are set aside and the issue u/s 35(2AB) of the Act is remanded
back to the file of the assessing officer for reconsideration. The
assessing officer shall reconsider the issue and decide the same afresh in
accordance with law after giving reasonable opportunity of hearing to the
assessee.

*52.* In the result, the appeal filed by the assessee is partly allowed.
■■
------------------------------

*
<http://www.taxmann.com/fileopennew.aspx?Id=101010000000090373&mode=home&Page=CIRNO#rfn1>Partly
in favour of assessee.

--
Regards,

*Pawan Singla ,** LLB*
*M. No. 9825829075*