ASST CIT (LTU) 1, MUMBAI vs. GRASIM INDUSTRIES LIMITED (AS A SUCCESSOR TO ADITYA BIRLA NUVO LTD, MUMBAI

2 & 1248/Mum/2017 M/s Grasim Industries Limited O R D E R Per Padmavathy S, AM: These Cross Appeals by the assessee and the Revenue are against the order of the Commissioner of Income Tax (Appeals)-55, Mumbai dated 31.10.2016 for Assessment Year (AY) 2011-12. The assessee and the Revenue raised various grounds pertaining to the following issues as tabulated below: Assessee

Ground No. Issues 1 Disallowance u/s 14A of the Act 2 Upholding the action of AO in adding the disallowance u/s 14A of the Act to book profits u/s 115JB of the Act. 3 Reduction in deduction u/s 80IA of the Act by increasing the input cost by including the component of excise duty / service tax / VAT claimed as CENVAT credit. 4 Upholding the action of the AO in treating corporate advertisement as capital expenditure of Rs. 1,80,54,376/- 5 Upholding the action of the AO of treating lease equalisation charges as notional expense and disallowing the same u/s 37 amounting to Rs. 19,48,66,687/- 6 Upholding the action of the AO of treating interest liability on Electricity Tax of Rs. 2,10,36,953/- is covered u/s 43B of the Act and is to be allowed on payment basis. 7 Reduction of capital investment subsidy from the actual cost of plant & machinery of Rs. 3,923,46,000/- 8 Upholding the action of the TPO of treating corporate guarantee given to subsidiaries as international transaction and partly confirming the additions made by the TPO. 9 Interest under section 234B, 234C & 234D. 10 Penalty proceedings u/s. 271(1)(c)

Revenue Ground No. Issues 1 to 4 Disallowance u/s 14A of the Act 5 Disallowance u/s 40(a)9ia) on year end provisions 6 Deleting the addition on account of CENVAT Credit ignoring the fact that the addition was made on net-basis and assessee, itself, withdrew its ground before ITAT for AY 2006-07 amounting to 3 & 1248/Mum/2017 M/s Grasim Industries Limited Rs. 10,05,32,813/- 7 Erred in allowing the of provisions made for leave salary / compensated absence relying on the order of the Hon’ble Tribunal in assessee’s own case for AY 2002-03 to AY 2006-07 which relied upon Bharat Earth Movers which was delivered before introduction of 43B(f) Q 8 Erred in holding that the HO expenses cannot be allocated to profits derived from 100% EOU falling u/s. 10B and directing to reduce interest income (Department ground is wrongly worded, allocation of HO expenses were to 80IA Unit) 9 Allowing additional depreciation u/s 32(1)(iia) in the succeeding assessment year where the assets were put to use for less than 180 days in relevant previous year 10 Deletion of addition made on account of ESOP expenses of Rs. 195,75,955/- 11 Deletion of addition of Rs. 2,80,01,727/- being expenditure on account of catalyst deployed in plant 12 Erred in allowing the claim of assessee of depreciation of goodwill amounting to Rs. 33,42,442/- 13 Erred in allowing the claim of the assessee of sale of certified emission receipt relying on My home Power Ltd. [(2012) 27 taxmann.com 27] amounting to Rs. 6,02,00,000/- 14 Erred in directing to treat interest subsidy from TUF as capital in nature amounting to Rs. 15,23,25,727/- (Amount is wrong in Department Appeal, actual amount = 17,81,17,446/-) 15 Erred in restricting the ALP of guarantee fees in respect of corporate guarantee given to AE to 0.5% as against 2.42% as held by AO/TPO 16. Erred in restricting ALP of performance guarantee fees to 0.5% as against 1.74% as held by AO/TPO.

4 & 1248/Mum/2017 M/s Grasim Industries Limited notices were duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of the International Transaction the assessee is having with its Associated Enterprises (AE). The TPO passed an under section 92CA of the Act dated 09.01.2015 computing a TP Adjustment towards performance guarantee at Rs. 5,26,17,801/-. The AO passed an assessment order under section 143(3) r.w.s. 144C of the Act by incorporating the TP Adjustments. The AO besides the TP Adjustment also made various additions/disallowances to arrive at the assessed income of the assessee under normal provisions at Rs. 412,98,31,100/-. The AO also recomputed the book profit under section 115JB at Rs. 549,90,08,672/-.

ITA No. 1065/Mum/2017-Assessee's appeal.

Disallowance under section 14A of the Act and adding the disallowance to book profits under section 115JB of the Act. – Ground No. 1 & 2.

7. We have heard the parties and perused the material on record. We noticed that the identical issue has been considered by the Tribunal in assessee's own case for AY 2010-11 (supra) wherein it is held that 5.3 The third contention of the assessee is that for the purpose of computing disallowance u/r.8D(2)(iii) only those investments are to be considered which have yielded exempt income. This contention of the assessee is supported by the decision rendered in the case of ACIT vs.Vireet Investments Pvt. Ltd.(supra). The assessee has filed fact sheet listing the investments where the assessee has earned dividend income. We deem it appropriate to restore this issue to the file of Assessing Officer for recomputation of disallowance u/r.8D(2)(iii) in line with the decision of Special Bench in the case of DCIT vs. Vireet Investments Pvt. Ltd.(supra). Thus in view of our above finding, ground No.1 and additional ground No.1 of the appeal by the assessee are partly allowed for statistical purpose." ***** 8. Respectfully following the above decision we remit the issue of disallowance towards indirect expenses back to the AO with similar directions.

“7. We find merit in the contentions of the ld. Authorized Representative for the assessee. For the purpose of computation of book profits under section115JB, disallowance made under section 14A r.w.r. 8D cannot be added. The Hon'ble Jurisdictional High Court in the case of CIT vs. Bengal Finance & Investment Pvt. Ltd.(supra) while answering the 7 & 1248/Mum/2017 M/s Grasim Industries Limited substantial question of law on this issue affirming findings of Tribunal observed : "4. So far as Question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s Essar Teleholdings Ltd. v/s. DCIT in ITA No. 3850/Mum/2010 to held that an amount disallowed under Section 14-A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue's Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Appeal No. 438 of 2012 rendered on 7th August, 2014. In view of the above, question (b) does not raise any substantial question of law". The Special Bench of the Tribunal in the case of Vireet Investments Pvt. Ltd.(supra) reiterated the view by holding that computation under clause (f) of Explanation 1 to Section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A r.w.r. 8D. Thus, in the light of the above decisions, ground No.2 of the appeal by the assessee is allowed.”

Deduction under section 80IA of the Act – Ground No.3 11. The assessee has claimed deduction under section 80IA of the Act towards its power plants located in Beraval and Chennai. The AO noticed that the assessee has not allocated the Head Office expenses to the units and worked out on prorate basis a sum of Rs. 71,25,176/- to be reduced from the profits eligible for deduction under section 80IA. The AO further noticed that the assessee has shown the expenses without including the component of excise / CENVAT / service tax, etc and called on the assessee to submit the details of the tax component on the expenses on consumption of raw-materials and other services

8 & 1248/Mum/2017 M/s Grasim Industries Limited in relation to these power plants. Based on the details furnished by the assessee, the AO computed an amount of Rs. 16,03,42,300/- to be deducted from the profits computed for the purpose of claiming deduction under section 80IA. On further appeal, the CIT(A) confirmed the deductions made by the AO from the profits eligible for section 80IA of the Act. The CIT(A) with regard to the deduction made towards excise / CENVAT / VAT directed the AO to rework the deduction based on actual expenditure and restrict the disallowance accordingly. Aggrieved the assessee is in appeal before the Tribunal.

13. We have heard the parties and perused the material on record. We noticed that on identical issues the co-ordinate bench in assessee's own case for AYs 2008-09 to 2010-11 has held that “3.10. Even on merits, we find that the main grievance of the Revenue is that the assessee had not debited certain expenses in the eligible unit i.e. 80IA units and thereby had claimed excess deduction u/s.80IA of the Act in the return of income. We find that this aspect has been addressed elaborately by the ld.CIT(A) and the ld. CIT(A) had deleted the said disallowances by placing reliance on various decisions of Tribunals, High Courts and Supreme Court and granted relief to the assessee. Relevant observation of the ld. CIT(A) are as under:- 6.3 I have carefully perused the facts of the case and arguments advanced by the AR The AO has observed that the appellant is booking the expenses in its P&L account net of CENVAT which is 9 & 1248/Mum/2017 M/s Grasim Industries Limited shown separately in balance sheet under CENVAT receivable account. The AO held that 80-IA unit has to be looked upon viewed as standalone unit and in computing all the business expenses including duties and taxes has to be taken into account to arrive at correct and true profits of the 80-1A units Accordingly, AO reduced the deduction u/s 801A of Rs 2,17 27,798/- and added back to the total income of the appellant. 6.4 During appellate proceeding, the appellant submitted that if stand of the AO is accepted i.e. VAT component on expenditure incurred by the 801A eligible unit is to be considered as an expenditure actually incurred by the 801A eligible units, then such VAT credit allowable to main plant should also be treated as income of the eligible unit as the Appellant while determining the revenue of 801A eligible unit has adopted rate charged by State Electricity Board to manufacturing plant as market price of electricity generated by the power plant and has made no adjustment on account of VAT credit allowable to main plant on account of electricity purchased by main plant from 801A eligible unit. Accordingly, there will be no impact in the deduction u/s 801A claimed by the Appellant as one side expenditure of eligible unit will be increased and on other side income of the eligible unit will be increased. The appellant also submitted that the cenvat credits are in the nature of reimbursements and bear a direct nexus to the business of the eligible unit and therefore would qualify for the deduction w/s 801A of IT Act, 1961. 6.5 I find that the issue had been settled by Hon'ble Apex court and High Courts in favour of the appellant. The Hon'ble Apex Court in the case of CIT vs. Meghalaya Steels Ltd reported in 383 ITR 217 had decided that the subsidies reimbursed to the assessee for element of cost relating to manufacture or sale of their products bear a direct nexus between profits of assessee's business and reimbursement of such subsidies and therefore such subsidies are eligible for deduction u/s 8018 rws. 801C of IT. Act, 1961. The relevant finding of Hon'ble Apex Court is as under :- "Assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, do not fall under the head "income from other sources", which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iiib) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the 10 & 1248/Mum/2017 M/s Grasim Industries Limited Government of India, will be income chargeable to income tax under the head "profits and gains of business or profession" If cash assistance received or receivable against exports schemes are included as being income under the head "profits and gains of business or profession", it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head "profits and gains of business or profession", and not under the head "income from other sources" The Hon'ble Delhi High Court in the case of CIT vs. Dharam Pal Prem Chand Ltd reported in 317 ITR 353 had decided that: "The finding of the authorities below was that the refund of excise duty was pivoted on the manufacturing activity carried on by the assessee. Once such a finding of fact had been returned, there was no need to go further and to examine the immediate and proximate source of refund of excise duty. As a matter of fact, in the questions proposed by the revenue, there was no specific question that the said finding of the authorities below was perverse. There was of course a very broad-based and general question that the order passed by the Tribunal was perverse, in law, and on facts. Such a question was vague. [Para 5] Further, the language appearing in section 80-1B is 'profit and gains derived from any business'. Therefore, the test of proximity, i.e., direct nexus with the industrial activity is not necessary while claiming a deduction under section 80-1B. [Para 5.2] In the circumstances, the judgment of the Tribunal deserved to be sustained." The Hon'ble Madhya Pradesh High Court in the case of CIT vs. Siddharth Tubes Ltd reported in 296 ITR 221 had decided that :- "Held that from the facts placed on record one was not able to say that any refund had been diverted for the purpose other then the business of the industrial undertaking and, therefore, there was no hesitation in holding that the amount refunded had the result of inflating the profits and gains of the industrial undertaking. As the duty of excise had the effect of increasing the profits and gains of the industrial undertaking within the parameters of sections 80HH and 80-1, the relief could be given.

11 & 1248/Mum/2017 M/s Grasim Industries Limited Therefore, refund of excise duty was includible in its profits computed for the purpose of deductions under sections 80HH and 80-I. The Hon'ble Gujarat High Court in the case of CIT vs. Shah Alloys Ltd reported in 396 ITR 711 had decided that "Whether interest received on margin money placed for business purpose cannot be treated as income from other sources and, therefore, eligible for deduction under section 80-IA being incidental to business of assessee-Held, yes." The Hon'ble Meghalaya High Court in the case of Pr. CIT vs. Shree Mahabir Foods Ltd reported in 282 CTR 112 had decided that "Deduction under section 80-18 would be allowed on the transport subsidy recen from the Government when it was not the case of revenue that the transport subsidy had no bearing on the cost of production of the industrial undertaking of the assessee." The Hon'ble Delhi ITAT in the case of JK. Aluminium Co. vs. ITO reported in 292 CTR 112 had decided that “As we have observed from the papers in the paper book, the exempt amount has been paid as is evident from the orders granting the refund which are placed. The Supreme Court after examining the affidavits passed on 11.01.2010 in the case of CIT vs. Dharam Pal Prom Chand Ltd. and after hearing both the parties, eventually dismissed the appeal of the Department against order of Delhi High Court on 22.02.2010. As is clear, the Notification dated 14.11.2002 exempts the amount of paid ensure proper control over the transactions, the Notification only requires the manufacturers to first deposit the excise duty and then claim the refund of the same next month. Thus the refund is assessee's own money itself in a way security deposit which is being refunded on submission of the evidence depositing the same. Therefore, in our view this is not an income at all. Therefore, the A.O, in our view, was not justified in making a separate addition of income and thereby denying the relief eligible u/s 80.IB of the Act on that amount." Thus, respectfully following the judicial decisions cited supra and considering the facts of the case, hold that the appellant is eligible to claim the deduction u/s 80IA of I.T. Act. 1961, I direct the AO to delete 12 & 1248/Mum/2017 M/s Grasim Industries Limited the disallowance of deduction u/s 80IA of Rs.2.17.27.798/- made in the assessment order. Accordingly, Ground No 2 is hereby Allowed. 3.11. We further find that the similar issue had arose before this Tribunal in the case of Ambuja Cements Ltd vs. Addl. CIT in ITA No.2384 & 3475/Mum/2019 and 1241/Mum/2018 for A.Y. 2010-11, 2011-12 and 2012-13 and ITA Nos. 2958 and 3843/Mum/2019 and 1889/Mum/2018 for A.Yrs. 2010-11, 2011-12 and 2012-13 vide consolidated order dated 07/11/2022 wherein this Tribunal had held as under:- 99. In ground no. 6, the assessee has raised the following grievances: On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified and grossly erred in confirming the action of the AO in treating CENVAT credit availed on inputs and capital goods used in the undertakings eligible for deduction u/s 801A as cost of the eligible undertakings.

by the Revenue are dismissed.”

14. The facts being identical, respectfully following the decision of Co- ordinate Bench in assessee's own case, we allow the issue in favour of the assessee.

Treating corporate advertisement as capital expenditure – Ground No.4

Disallowance of lease equalization charges – Ground No.5

“(iii) Without prejudice to above, even on merits, the contention of the assessee is not acceptable. The lease equalization charges are nothing but merely a notional charge on the profit and loss account of the assessee. The assessee company during the course of their business has to take showrooms on lease at various locations all over India, which often are in the nature of long term "Leave & License" agreements and have 17 & 1248/Mum/2017 M/s Grasim Industries Limited incremental rent clauses year after year. The same can be explained by way of a simple le example. Let's assume that the assessee company entered in to a lease agreement for 5 years with a vendor. As per terms the lease charges or rent to be paid is say Rs.100/- for the first year with Rs. 10/- increment in every subsequent year. Then the total rent paid over 5 years would be Rs. 600/-, which shall be claimed and allowed to the assessee company in the respective years of payments made by them. But, what the assessee company does is that they compute total rent payable over the complete lease period (Rs. 600/- in this example) and divide the same by the number of lease years (5 years in this example), and claim such notional rent figure as rent expenses, which can be illustrated with the help of following table:- Year Rental Charges Debit in Profit and Total debit in (Rs.) loss account on Profit and loss account of lease account equalization charges 1 100 20 120 2 110 10 120 3 120 0 120 4 120 0 120 5 150 - 120 Total 600 - 30 600 (iv) Thus it can be seen from the example as above that the lease equalization charges is nothing but a notional entry in the books without any corresponding obligation of the assessee to pay the same. As far as making the notional entry in the books of accounts is concerned, as per certain accounting standards or assessee's consistent accounting policies, the same can very much be followed for the purpose of book entries, but while computing the income as per the provisions of the Act, necessary adjustments therein has to be made mandatorily. Now Section 30 of the Act read as below:- Sec. 30. "In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed- (a) where the premises are occupied by the assessee- (i) as a tenant, the rent paid for such premises;....." (v) Thus, it is the rent actually paid or payable which is allowable as an expenditure not the lease Equalization charges as has been sought to be claimed by the assessee. Since the above charges are notional in nature 18 & 1248/Mum/2017 M/s Grasim Industries Limited and no actual liability has been incurred, the claim of the assessee to allow the expenses of Rs 19.49 cr is rejected.”

22. The ld. DR on the other hand submitted that the applicability of accounting standard mandatorily to assessee's case is only with respect to preparation of financial statements as per the Companies Act and cannot be applied for the purpose of Income Tax. The ld. DR further submitted that the claim made by the assessee first time before the AO by relying on the decision in the case of Virtual Soft (supra) is not correct since in the said decision the lease equalization charges were allowed with respect to the finance lease and in assessee's case it is the operating lease and therefore it is distinguishable. On the contention of the ld. AR that section 30 should be read along with section 43(2) of the Act, the ld. DR submitted that the said section provides that amount actually paid or incurred according to the method of accounting upon the basis of which profits and gains are computed under the head "Profits & Gains of Business or Profession". The ld. DR argued that what the section envisages is the computation as per the Income Tax Act and that the assessee has in the computation of income (page 50 of PB) has disallowed the lease equalization charges while computing the income under the head "Profits & Gains of Business or Profession" therefore, the assessee cannot make the claim that it is allowable as per section 43(2) based on what is debited in the books of accounts. The ld. DR further submitted that when the assessee is liable to pay the rent as per the agreement which is accounted as per accounting standard -19 cannot be termed as ascertained liability and therefore, is not an allowable expenditure. With regard to the reliance placed in the decision of the Kolkata Bench in the case of Bata India Ltd. (supra) the ld. DR submitted that the issue contended in the said appeal was with regard to the claim of current year expenditure and therefore,

20 & 1248/Mum/2017 M/s Grasim Industries Limited distinguishable. The ld. DR also submitted that the decision of the Delhi Bench in the case of Claridge Hotels (supra) is also distinguishable since in the said case reliance was placed on the decision of the Delhi High Court in the case of Virtual Soft (supra) which is a finance lease and therefore, not applicable in assessee's case.

“30. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the Id CIT(A) and other materials brought on record. The Ld Counsel submitted before us that during the financial year 2007-08 the Expert Advisory Committee of the Institute of Chartered Accountants of India had issued a clarification in respect of mandatory Accounting Standard-19 on accounting of operating lease rent expense. Pursuant to the said clarification the assessee was required to recognize in its annual audited accounts the scheduled rent increments over the lease term on a straight line basis in respect of all existing operating lease agreements remained in force on or after 2001. The assessee adopted the method prescribed in the Accounting Standard-19 for accounting of operating 21 & 1248/Mum/2017 M/s Grasim Industries Limited leases in the relevant year under consideration since the relevant clarification to AS-19 was issued by ICAI only in the relevant year. The assessee therefore had to compute the impact of such straight-lining of lease rent from 01.04.2001 up to 31.03.2007 which was determined at Rs 39,718,000/- and the same was accounted under the head "Prior Period Expenses' in the Profit &Loss account. A further sum of Rs.40,647,000/- was determined as the current year's expense on account of straight-fining of lease rent which was debited to the Profit &Loss account. In the return of income filed for the A.Y. 2008-09, the assessee inadvertently added back both prior period expense of Rs.39,718,000/- and the current year's expense of Rs. 40,647,000/- while computing income under normal provisions of the Income-tax Act, 1961. In the course of assessment however the assessee claimed the deduction for the current year's expense of Rs.40,647,000/- before the Assessing Officer while assessing profits from the business. The AO however in his impugned order did not even take cognizance of the assessee's submissions and ignored the claim made by the assessee. The Ld. Counsel further submits before us that assessee made a detailed submissions during the appellate proceedings about the mandatory Accounting Standard-19, issued by the Institute of Chartered Accountants of India AS AS-19 requires that the operating lease expenses be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used. Paragraphs 23 and 24 relate to payments of lease rental and view the matter from the lessee's perspective. The relevant extracts of Paragraph 23of AS-19 which lays down the accounting guideline for operating lease expenses from the standpoint of the lessee' is as follows: "Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern of the user's benefit" Paragraph 2 A8-19 explains the previous paragraph 23 and states that lease rental will be accounted on a "Straightline basis", unless another systematic basis is more representative of the time pattern of the user, even if the payments are not on that basis.

31. We note that Hon'ble Supreme Court explained the importance of mandatory accounting standards in the case of Kris LALUON (297 ITR 776) (SC) wherein the Court held that the main object sought to be achieved by Accounting Standards which are now made mandatory is to see that 22 & 1248/Mum/2017 M/s Grasim Industries Limited accounting income is adopted as taxable income and not merely as the basis from which taxable income is to be computed. The Supreme Court explained its position by citing examples. In case of inventories, the valuation rules are laid down in the Accounting Standards which are followed in the determination of accounting income. Since the income tax law does to lay down any such rules, the tax authorities are not required to examine the computation of the valuation of inventories and its effect on computation of income. However, in case of depreciation on assets, different rules accounting guidelines are laid down in the Accounting standards vis a vis Income tax Act, 1961. Accordingly, in such cases the provisions & rules laid down in LT Act, 1961 & LT. Rules, 1962 are to be followed. The Apex Court observed that under Section 211 of the Companies Act, 1955 every company is mandatorily required to prepare its accounts in accordance with the Accounting Standard, presented by the Central Government in consultation with National Advisory Committee on Accounting Standards and at present the Accounting Standards prescribed by the Institute is deemed to be the Accounting Standards which are to be complied by all the companies. The Supreme Court therefore accorded Judicial recognition to the accounting standards issued by ICAI and the profits determined in accordance with the accounting guidelines laid down by the prescribed accounting standards was held to be depicting true & fair state of affairs of a company for tax purposes. Accordingly, the Assessing Officer has to adopt the profit determined by the assessee company in consonance with the accounting standards while assessing taxable income if there is no explicit & contrary provision in the income-tax laws. We note that this principle was reiterated by the Supreme Court in the case of CIT v. Woodword Governor (P) L (20091 312 ITR 254/179 Taxman 326 wherein it was held that the profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting unless such principles stand superseded or modified by legislative enactments concerning assessment of total income. Applying the ratio laid down by the Supreme Court in the above cited judgments, we note that the method of accounting followed by the assessee cannot be doubted unless it is contrary to the generally accepted accounting practices or if the same has been superseded or modified by a specific legislation brought about in the Income-tax Act, 1961. In the facts of the present case the assessee being a company followed mercantile basis of accounting and prepared its accounts in accordance with Section 211 of the Companies Act, 1956 and the notified accounting standards. It is by now well settled that matching principle of accounting ensures purity of Profit & loss Account and ensures true & fair ascertainment of income. Accordingly, in light of Guidance Note issued by EAC of ICAI and the accounting guidelines laid down in Paras 23

23 & 1248/Mum/2017 M/s Grasim Industries Limited & 24 of AS-19, the assessee had changed its accounting treatment of operating leases expenses. In consonance with AS-19 the lease rent expenditure was recognized on a straight-line basis which was considered to be a more systematic and rational basis by accounting experts. On accounting of escalating rentals in the operating lease agreements, it led to creation of additional lease rental liability in the relevant year under consideration which was debited to the P&L. Ale under the head "Rent Straight-Lining". This accounting treatment was in sync accounting guidelines laid down by ICAI which the assessee was required to mandatorily follow. The profits so determined after accounting for the expense towards straight-lining of lease rentals reflected a better & accurate picture of the true commercial profits of the assessee company, In light of the law down by the Apex Court since there are no contrary or specific provisions in the Income-tax Act, 1961 in respect of accounting of lease rentals, the expenditure of Rs 40,847,000/- so recognized in the Profit & Loss account is deductible 137 while computing profits of the business. We note that ld CIT(A) has rightly held that assessee is entitled to claim deduction of Rs. 40,647,000/- on account of lease rent, observing the following: "13.4 1 have considered the facts of the case. The assessee had taken several assets on operating lease basis. In certain agreements, there was clause for scheduled increase in lease rent. Earlier, the assessee was not taking into account such scheduled increase while debiting the least rent. However, ICAI issued AS-19 for accounting of operating lease and a clarification relevant to the issue was issued in the year under consideration. As a consequence, the assessee had to compute impact of straight-lining of lease rent from 01.04.2001 to 31.03.2007 which was determined at Rs. 3,97,18,000/- and the same was accounted under the head prior period expenses'. For the current year, a further sum of Rs.4,06,47,000/- was determined on such straight-lining. In his computation of return income the assessee added back prior period expenses at Rs. 3,97,18,000/- as well as current year's expense of Rs.4,06,47,000/-, Since the latter expense pertained to the year under consideration, the assessee was entitled to claim the sum in computation of taxable income. The assessee has claimed to have made such claim before the assessing officer. But the assessing officer has not discussed the same in the assessment order. As explained by the assessee, the clarification regarding AS-19 was issued by ICAI in July, 2007. Thus, the requirement of straight-lining the lease rent arose in the year under consideration. The assessee was thus justified to adopt straight-lining of lease rent during the year. The Karnataka High Court in the case of Prakash Leasing Limited. Dy. CIT (208 Taxman 464)

24 & 1248/Mum/2017 M/s Grasim Industries Limited held that as long as Central Government has not notified anything to the contrary, an assessee was well within its right to follow AS and to claim lease equalisation charges in accordance with the same. Similar view was expressed by the Hon'ble Delhi High Court in the case of CIT v. Virtuaal Soft Systems Ltd 341 ITR 593. In the assessee's case, it has followed accounting standard issued by ICAI relating to operating lease. As a result of straight-lining recommended by the accounting standard, there was a requirement to make provisions for scheduled rent increase. Such provision relating to the year under consideration was of Rs. 4,06,47,000/-. The accounting standard was not in conflict with any provision of the Act or notification made by the Central Government u/s 145(2) of the Act. It is also not the case of the assessing officer that the system of accounting followed by the assessee was such that the correctness and completeness of accounts was to be doubted. Rather, the assessee has followed accounting standard issued by ICAL. The assessee had made the claim in the assessment proceedings and the assessing officer has neither allowed nor given reason for its rejection. In the remand report dated 03.01.2014, the assessing officer has objected to the assessee's claim on the ground that such claim was not made by way of filing revised return. Apparently, be intends to draw strength from the decision of the Hon'ble Supreme in the case of Goetze India Ltd. 284 ITR 323, though he has not specifically mentioned the same. However, in the said decision itself, Hon'ble Supreme Court has clarified that the bar on claiming a deduction not claimed in the return does not apply on the appellate authority. In the decisions in the case of National Thermal Power Co Ltd. (xupro) and Jute Corporation India Ltd. (supra) Hon'ble Supreme Court has held that appellate authority has power even to admit a claim not made in the proceedings before the lower authority. Power of CIT(A) to consider claim not made in the return has also been upheld in the decision of Delhi High Court in the case of CIT v. Jindal Saw Pipes Ltd. 328 ITR 338 and by Bombay High Court in the case of CIT v. Pruthvi Brokers and Shareholders P. Ltd. 349 ITR 336. It is also noted, that jurisdictional bench of tribunal, in the case of DCIT, Circle-50, Kolkata v. Ramesh Chandra Kedia ITA No. 2072/Kol/2007, has held after considering various decisions, including in the case of Goetze India Ltd. (supro) that CIT(A) has power to admit additional ground claiming relief not claimed in the return and without filing revised return, even if the same results in assessed income going below the returned income. In his report dated 3.1.2014, the assessing officer has not given any comment or adverse remark on merit of the claim and not pointed out any defect or shortcoming in the same. In the light of the facts discussed earlier, the 25 & 1248/Mum/2017 M/s Grasim Industries Limited assessee is entitled for deduction of Rs. 4,06,47,000/-, The assessing officer is directed to allow the same." We do not find any infirmity in the order of ld CIT(A) in allowing the claim of the assessee in respect of lease rent of Rs.4,06,47,000/-, therefore, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby accepted and the ground No. 5 raised by the Revenue in ITA No.77/kol/2014, is dismissed.

,raised by the AO is about deleting the addition of Rs.1.08 Croees. During the assessment proceedings,the AO found that the assessee had claimed the above mentioned amount under the head Rent being AS 19. Provisions.He called for justification for allowing the same.After considering the reply of the assessee,the AO held that the disputed amount was nothing but prepaid expenses which ought to have been claimed in the relevant financial year to which it belonged,that the amount was a balance-sheet item and not a P&L A/c.item.Finally,he treated the amount in question as prepaid expense and made a disallowance of Rs.1,08,45,878/- 7.Before the FAA,the assessee made elaborate arguments and produced additional evidences. He called for remand report from the AO.After considering the Report and rejoinder to the report of the AO,the FAA held that lease expenses were nothing but expenses that accrued to the assessee and were computed as per the provisions of Accounting Standard-19(AS-19),that the assessee had to follow the AS compulsorily, that AS-19 had been prescribed by the ICAI to claim lease expenses,that the expenses were claimed in accordance with accounting standard,that AO was not justified in treating the expenses as contingent/unconfirmed,that the claim made by the assessee was based on scientific method,that the assessee was following the same method in earlier years.Finally,he held that the lease payment under the operating lease should be recognised as an item of the P&L A/c on a straight line basis over the lease period.He deleted the addition made by the AO. 8.Before us,the DR supported the order of the AO.AR relied upon the order of the FAA and stated that the assessee followed the mandate of AS-19, that the 26 & 1248/Mum/2017 M/s Grasim Industries Limited provision was made on a scientific basis, that rent payable was allowable as per the section 30 of the Act. 9.We find that the AO had made the disallowance as he was of the opinion that it was a prepaid expense and that it could not be claimed during the year under appeal, that the assessee had claimed the expenditure as per the provisions of AS-19, that the agreement entered into by the assessee was in the nature of operating lease as defined in AS-19, as per the accounting standard in such cases the payments have to be considered as an item of P&L account on a straight line basis over the lease period. The FAA had given a categorical finding of fact that the provision of Rs.1.08 crores was in respect of the liability that had accrued during the FY 2009-10.We are of the opinion that, by following AS-19 the assessee has complied with the provisions of the Act, that AS-19 provides that in case of operating leases, the lease rent payment has to be treated as an allowable expenditure. Therefore, in our opinion, the order of the FAA does not require any interference from our side.

25. Considering that the facts in assessee's case being identical, we place reliance on the above decisions, to hold that the lease rent claimed by the assessee as per AS-19 is to be allowed as a deduction and the AO is directed to delete the disallowance made in this regard.

Treatment of interest liability as part of Electricity Tax for the purpose of section 43B – Ground No.6 26. The assessee through a note submitted before the AO claimed the interest on electricity tax to the tune of Rs. 2,10,36,953/- which have been disallowed under section 43B while filing the return of income should be allowed as a deduction for the reason that interest is not part of the electricity charge payable and therefore, should be allowed as deduction with respect of the status of actual payment. The ld. AO denied the claim of the assessee first on the ground that the claim is made not in the return of income by relying on the decision of Hon'ble Supreme Court in the case of Goetze India (supra). On merits, the AO did not allow the claim stating that there is direct nexus between

27 & 1248/Mum/2017 M/s Grasim Industries Limited the tax and the interest and both are very well the statutory liability which shall be allowable only on payment under section 43B of the Act. The AO in this regard relied on the decision of the Hon'ble Rajasthan High Court in the case of Mewar Motors Vs. CIT (2003) 260 ITR 218 (Raj.). On further appeal, the CIT(A) upheld the order of the AO.

28 & 1248/Mum/2017 M/s Grasim Industries Limited stating that the interest payable is part and parcel of the Electricity Tax. The contention of the assessee is that the interest is not part of the tax payable and is compensatory in nature that should be allowed as deduction under section 37 of the Act. Therefore the question before us for consideration is whether the interest levied on unpaid portion of Electricity Tax is part of the tax and hence to be allowed only on payment basis. In the given case, there is no dispute that the assessee has not paid the Electricity Tax and it is also not in dispute that the interest charged on the same is unpaid. The assessee placed reliance on various judicial pronouncements to contend that interest which is compensatory in nature is not part of tax and therefore provisions of section 43B are not applicable to unpaid interest. Before proceeding further we will look at the relevant provisions of section 43B of the Act and the Tamil Nadu Tax on Consumption or Sale of Electricity Act, 2003, which read as under –

Certain deductions to be only on actual payment. 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of— (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) **** Recovery of Electricity Tax: 7. Any electricity tax due under this Act which remains unpaid – (a) shall be deemed to be in arrears and thereupon interest at the rate prescribed by the Government, from time to time, shall be payable on such electricity tax; and (b) shall, together with any interest payable under clause (a) be recoverable either as an arrear of land revenue or by deduction from any amount payable by the Government to the licensee.

41. We further find that Hon'ble Calcutta High Court in the case of CIT v. Orient Beverages Ltd. (supra) has held that: Interest payable for arrears of municipal taxes is compensatory in nature and not a penalty or tax and, therefore, unpaid amount of interest is not liable to be disallowed under Section 43B.

30 & 1248/Mum/2017 M/s Grasim Industries Limited Act, 1922, because it was paid by way of penalty or infringement of the Cess Act. In that actual situation the Supreme Court held that the interest payable under Section 3(3) of the Cess Act was not a penalty paid for an infringement of law and was an allowable deduction under Section 10(2)(xv) of the Act. At p. 434 of the said decision, the Supreme Court has made the following observation : In truth, the interest provided under Section 3(3) is in the nature of compensation paid to the Government of delay in the payment of cess. It is not by way of penalty. From the above it is clear that in this decision the Supreme Court has made it clear that the interest paid under the Cess Act is not a penalty but a compensation paid to the Government. Mr. Agarwal, learned advocate appearing on behalf of the Department, however, seeks to distinguish this decision on the footing that this decision was rendered on a different fact situation. This argument of Mr. Agarwal, we are afraid, is not acceptable because on the similar question subsequent decision was rendered by a Division Bench of this Court in Russels Properties (P) Ltd. v. CIT (supra) following the aforesaid decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT (supra), in the said case, Their Lordships also came to a conclusion that interest paid under the Calcutta Municipal Act, 1951, which is also a matter for consideration by us in this case, is not for defiance of law and, therefore, this is an allowable deduction under the Act. At p. 365 of the said decision, Sabyasachi Mukherjee, J. observed as follows: The Supreme Court was of the view that interest payable on arrears of cess under Section 3(3) was in reality part and parcel of the liability to pay cess. It was an accretion to the cess. The arrears of cess, according to the Supreme Court, if the cess was not paid within the prescribed period, a larger sum would become payable as cess. We have not noticed the nature of Sub-section (3) of Section 236 of the Calcutta Municipal Act, which is more or less on similar terms. It is also a like expression as used in Section 3(3) of the U.P. Sugarcane Cess Act, 1956, which enjoins that 'interest shall be payable'. The Supreme Court was of the view 'that in truth the interest provided under Section 3(3) of the U.P. Sugarcane Cess Act, 1956, was in the nature of compensation paid to the Government for delay in the payment of cess. It was not by way of penalty for which provision has been separately made by Section 3(5). From the above, we cannot agree with Mr. Agarwal, learned advocate for the Revenue, that since the principle laid down in the said decision of the 31 & 1248/Mum/2017 M/s Grasim Industries Limited Supreme Court cannot be applied to the facts of this case, as we find that Sabyasachi Mukherjee, J. (as His Lordship then was) in the aforesaid Division Bench decision considered the Cess Act as well as the Calcutta Municipal Act, with which we are not therefore (sic), it cannot be disputed that the decision of Hindustan Motors Ltd. (supra), as rendered by Sabyasachi Mukherjee, J. (as His Lordship then was) was so rendered applying the principles laid down in the aforesaid decision of the Supreme Court and the submission of Mr. Agarwal that the decision of the Supreme Court was not applicable in this case, cannot be alleged. That apart, we are also fortified by a recent decision of this Court in the case of Hindustan Motors Ltd. v. CIT . It appears that there was a difference of opinion on the question mentioned above between the Hon'ble Chief Justice Mr. K.C. Agarwal (as His Lordship then was) and the Hon'ble Justice Mrs. Ruma Pal (while she was in this Court). The matter was referred to a Third Judge, the Hon'ble Justice Prabir Kumar Majumdar (as His Lordship then was). His Lordship by his order dt. 20th Feb., 1995, agreed with the views expressed by Ruma Pal, J. and held that he was not inclined to agree with the answer put forward by the Hon'ble Chief Justice K.C. Agarwal, but on the other hand, he accepted and agreed with the answer proposed by Ruma Pal, J. There is yet another Division Bench decision of this Court in CIT v. Padmavati Raja Cotton Mills Ltd. , which also laid down the same principle following the Division Bench decision just now referred to above in the case of Hindustan Motors Ltd. v. CIT (supra). In the case of Pratibha Processors and Ors. v. Union of India and Ors. (1966) 11 SCC 101, in para 13, the Supreme Court has observed as follows : In fiscal statutes, to import of the words 'tax', 'interest', 'penalty', etc.' are well known. They are different concepts. Tax' is the amount payable as a result of the charging provision. It is a compulsory extraction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct in character and is imposed on an assessee, who has withheld payment of any tax and when it is due and payable, the levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax in the due date. Essentially, it is compensatory and duty for penalty-- which is penal in character. In view of our discussion made hereinabove, it is, therefore, clear that the interest payable for arrears of principal taxes is really compensatory in nature and not a penalty/tax.

32 & 1248/Mum/2017 M/s Grasim Industries Limited It is settled beyond dispute that interest on late payment of municipal rates is not in the nature of a payment of penalty, and is thus clearly deductible as a general business expenses under Section 37. The requirement of Section 43B that even for assessees following the mercantile system, payments by way of tax, duty, cess, etc. cannot be claimed as deductions unless actual payment has been made in the previous year, is also not applicable in this case, because the words of the section encompass the municipal rates but interest thereon--CIT v. Padmavati Raje Cotton Mills Ltd. and Hindustan Motors Ltd. v. CIT followed. Interest payable on unpaid municipal rates is not in the nature of penalty and therefore, it is clearly deductible under Section 37; Section 43B is also not attracted as it is applicable to municipal rates and not to interest thereon.

Reduction of capital investment subsidy from actual cost of Plant & Machinery – Ground No.7 32. In the course of assessment proceeding, the AO observed that the assessee has claimed the capital investment subsidy of Rs. 3.93 crores and the same has been credited to the capital reserve without affecting the P&L A/c or depreciation. The assessee submitted before the AO that the said subsidy is received from West Bengal Government for expansion of its textile unit under West Bengal Incentive Scheme 2004 and that the said subsidy is capital in nature. The AO held that the definition of actual cost as provided in section 43 sub- section (1) specifically mentioned that the actual cost means the actual cost of the assets to the assessee as reduced by the portion of the cost as has been met directly or indirectly by any other person or authority. Accordingly, the AO reduced the subsidy received by the assessee from the cost of Plant & Machinery which resulted in the disallowance of depreciation to the tune of Rs. 1,37,36,100/-. The CIT(A) upheld the action of the AO by holding that “20.2 Decision: I have carefully considered the submissions of the appellant. The contention of the appellant that the capital investment subsidy received from the West Bengal Government for expansion of its Textile unit under the West Bengal Incentive Scheme 2004 are not connected with any specific machinery or plant hence the same cannot be treated as "cost directly or indirectly met by any other person" within the meaning of explanation to Section 43(1). The appellant has heavily relied on the ITAT in the case of Godrej Agrovet Ltd. and other decisions. The ruling of Supreme Court in the case of P.J. Chemicals (120 ITR 830) held that the subsidy received from Government but not for the specific purpose of meeting a portion of the cost of assets, though quantified

34 & 1248/Mum/2017 M/s Grasim Industries Limited as percentage of such cost, and the same is therefore not deductible from the actual cost" for the purpose of calculation of depreciation. On perusal of the Incentive Scheme, I find that the subsidy has been granted for the purpose of expansion of the existing plant of the appellant. It is also not disputed that the subsidy has been granted only because of capital expenditure incurred by the appellant for expansion. The definition of the "Actual Cost" as per section 43(1) specifically provides that Actual cost means the actual cost of the assets to the assessee as reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Further the explanation 10 to section 43(1), further clarify the same law. The decision of Hon'ble Supreme Court is prior to the insertion of explanation 10 to section 43(1) hence cannot be applied for the current assessment year. Accordingly I hereby confirm the action of AO to reduce the subsidy amount from the cost of the assets for the purpose of calculating deprecation; accordingly this ground of appeal is dismissed.”

33. The ld. AR submitted that for the limited purpose of calculating the subsidy amount, the investment made in Plant & Machinery has been considered as per the Scheme. The ld. AR further submitted that as per the scheme the subsidy is given in order to promote the textile industry and therefore, the investment cannot be held to have a direct nexus with the cost of Plant & Machinery and accordingly cannot be reduced from the actual cost.

35 & 1248/Mum/2017 M/s Grasim Industries Limited 35. We have heard the parties and perused the material on record. During the year under consideration the assessee has received capital investment subsidy of Rs. 3.93 crores and the same was credited to the capital reserve account. The assessee heavily relied on the decision of the Hon'ble Supreme Court in the case of CIT vs P.J. ChemicalsLtd., ([1994] 76 Taxman 611 (SC)) held that (head note) – “ Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the ‘actual cost’. The expression ‘actual cost’ in section 43(1) of the Income Tax Act,1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from ‘actual cost’. The amount of subsidy is not to be deducted from the ‘actual cost’ under section 43(1) for the purpose of calculation of depreciation etc.”

36 & 1248/Mum/2017 M/s Grasim Industries Limited which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.]

"Fixed Capital Investment" means investment made in Plant & Machinery and also equipment installed for Pollution Control Measures of the approved project of the eligible unit on or after the 1st April 2003 subject to other conditions laid down in paragraph 6 of the 2004 scheme “6. Eligibility criteria for incentives under the 2004 Scheme: 6.1.1 Any Industrial project in the large sector to which this scheme applies, shall be eligible for securing an eligibility certificate provided: (a) the project is covered by a detailed feasibility report/project prepared for the purpose: (b) the project has been approved and sanctioned by the Central Financial Institution or the commercial Banks or the State Financial Institutions, as the case may be in the case of projects with arrangement of finance from own resources, issue of eligibility certificate shall be considered provided the WBIDC is satisfied about the arrangement of such finance. 6.1.2 Any industrial unit in the small scale sector shall be eligible for incentives under this scheme subject to the fulfilment of the conditions specified below: (i) The unit in the small scale sector as defined under para 3(vii) above, shall be registered with the District Industries centre concerned finally or permanently. Such permanent or final registration must be valid and remain in force.

37 & 1248/Mum/2017 M/s Grasim Industries Limited However, in respect of subsidy on investment in plant and machinery the undertaking concerned may by provisionally or temporarily registered on or after the 1st April, 2004 and valid registration to the effect may be accepted in place of permanent or final registration and the amount of subsidy shall be judged on the quantum of investment in plant & machinery as verified and accepted by the Registering Authority. (ii) Industrial Co-operatives, undertakings assisted by K.VI.C. or W.B.K.V.L. Board as well as the undertaking set up under IRDP/ SESRU/IUEP/SEEUY and other similar self employment schemes receiving benefits in respect of any of the items specified under this Scheme shall also be eligible to get the benefit of other items only under this Scheme. 6.1.3 In case of tourism unit' eligibility certificate shall be issued by the West Bengal Tourism Development Corporation on satisfaction of arrangement of finance as mentioned at sub-para (b) of para 6.1.1 and the registration certificate shall be Issued by the Directorate of Tourism and that such a unit shall require no Industrial Licence or Letter of Intent or Registration Certificate under the Industries (Development and Regulation) Act, 1951 or a Secretariat for Industrial Assistance reference number from the Central Government. 6.2 (i) For the benefit of Subsidy for conversion to piped gas and for gas charges, an existing unit shall require registration with Greater Calcutta Gas supply Corporation Ltd. and also a certificate of expenditure approved by the Greater Calcutta Gas Supply Corporation Ltd. (ii) For the benefit of subsidy for installation of plant facilities for use of piped gas and for gas charges, a new unit/expansion project of and existing unit shall require registration certificate of Directorate of Industries, Directorate of Tourism or registration certificate from DIC as the case may be, eligibility certificate of W.B.LD.C. or W.B.T.D.C. and a certificate of expenditure approved by the Greater Calcutta Gas Supply Corporation Limited.

Transfer Pricing Adjustment – Ground No.8

42. The assessee raised 7 additional grounds as per details given below:

Sr. Assessee’s Gist of additional grounds No. Letter Dated 1. 06.02.2019 Additional ground no. 1 Claim of Education and Secondary and Higher Education Cess as an allowable expenditure 2. 15.06.2021 Additional ground no. 2- Re-computation of Dividend Distribution Tax ("DDT") liability on dividends paid to non-resident shareholders at beneficial rates as per applicable Double Taxation Avoidance Agreements and claim of refund for excess taxes paid. Additional Ground no. 3- Treating incentives under Market Linked Focus Product Scheme as a capital receipt and therefore not charging it to tax under the normal provisions of the Income-tax Act, 1961 ("the Act") 3. 02.11.2021 Additional ground no. 4- Treating incentives under Market Linked Focus Product as capital receipt and excluding it while computing book profits u/s 115JB of the Act. Additional Ground no. 5- Treating fertilizer subsidy as a capital receipt and therefore not charging it to tax under normal provisions of the Act and excluding it while computing book profits u/s 115JB of the Act. Additional Ground no. 6- Treating freight subsidy as a capital receipt and therefore not charging it to tax under normal provisions of the Act and excluding it while computing book profits u/s 115JB of the Act. 4. 25.07.2023 Additional ground no. 7 Treating sales tax subsidy as a capital receipt and therefore not charging it to tax under normal provisions of the Act and excluding it while computing book profits u/s 115JB of the Act.

41 & 1248/Mum/2017 M/s Grasim Industries Limited 43. With regard to the admission of the additional grounds, the ld. AR and ld DR presented elaborate arguments and also made written submissions which have been taken on record.

by the assessee.

46. Additional ground no 3 to 7 pertain to treatment of incentives under Market Linked Focus Product Scheme, fertilizer subsidy and sales tax subsidy as capital receipt under normal provisions of the Act as well as for the purpose of book profits under section 115JB of the Act. The argument of the ld AR is that there have been subsequent decisions by the Hon'ble High Courts and Tribunal in 42 & 1248/Mum/2017 M/s Grasim Industries Limited which the incentives and subsidies were held to be capital receipts and therefore the assessee has raised the issue through additional ground. The ld AR further submitted that the records relied upon are already part of the records and no new materials need to be examined. The ld AR also submitted that the issue could not be raised before the lower authorities since the judicial pronouncements came in subsequent to the appellate proceedings. The ld DR on the other vehemently argued that the claim of the assessee for treating certain incentives and subsidies as capital receipts are not tenable and therefore to be dismissed. The ld DR made a without prejudice submission that since the AO did not have an opportunity to examine the issue during assessment proceedings, the issues may be set aside to the AO for fresh examination.

Revenue's Appeal Disallowance under section 14A- Ground No. 1 to 4

5.2 The second contention of the assessee is that no disallowance u/r.8D(2)(ii) is warranted as the assessee is having own interest free funds in the shape of share capital, reserves & surplus and profits more than the investments made. Hence, there is no interest expenditure. The assessee by way of additional ground of appeal is seeking relief in respect of disallowance of interest expenditure under Rule 8D(2)(ii). The assessee suo motu disallowed Rs.91.32 crores under Rule 8D(2)(ii). The same was accepted by the Assessing Officer. The Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd.(supra) has held that where the assessee is having borrowed funds and own interest free funds, presumption is that the investments are made by utilizing own interest free funds. The same view has been reiterated by the Hon'ble High Court in the case of HDFC vs. DCIT(supra) and PCIT vs. Shreno Ltd.(supra). Thus, in principle we hold that no disallowance under section 14A r.w.r. 8D(2)(ii) is warranted if, the assessee is having sufficient own interest free funds to cover the investments made. However, for the purpose of verification of this fact, we deem it appropriate to restore this issue back to the file of Assessing Officer. The Assessing Officer after examining the financial statements of the assessee, if satisfied, that own interest free funds of the assessee are more than the investments made, shall make no disallowance u/r.8D(2)(ii).

44 & 1248/Mum/2017 M/s Grasim Industries Limited 50. Considering that the facts are identical for the year under consideration respectfully following the above decision, we remit the issue back to the AO with similar directions.

Disallowance under section 40A(ia) – Ground No.5

48 & 1248/Mum/2017 M/s Grasim Industries Limited 31.1 This issue is identical to the one already adjudicated by the Tribunal in assessee's own case for assessment year 2009-10 (supra). The relevant extract of the finding of the Tribunal read as under:-

"5. We have heard rival submissions. We find that this issue is already covered in favour of the assessee by the orders of this Tribunal from A.Yrs 2003-04 to 2008-09. We also find that for A.Y.2006-07, the revenue had carried this matter to the Hon'ble Jurisdictional High Court and the Hon'ble Jurisdictional High Court in Income Tax Appeal No.433/2015 dated 15/01/2018 had held that the question raised by the revenue does not give raise to any substantial question of law and accordingly, did not entertain the same. This goes to prove that the order passed by this Tribunal on the impugned issue had attained finality. Respectfully following the same, the ground No. 4 raised by the assessee is allowed."

The CIT(A) has allowed relief to the assessee by following the decision of Tribunal in assessee's own case for assessment year 2003-04 to 2006-07. We find no infirmity in the impugned order. Accordingly, ground No.5 of the appeal is dismissed.”

“9. We find that the Assessing Officer has disallowed the assessee's claim of additional depreciation amounting to Rs.5,71,08,316/- in respect of the assets acquired and put to use for less than 180 days in the earlier 49 & 1248/Mum/2017 M/s Grasim Industries Limited assessment years. The Assessing Officer has allowed 50% claim of additional depreciation in the current assessment year and has directed to reduce the total income accordingly. We observe that in the immediately preceding assessment year similar issue had come up before the Tribunal. The Co-ordinate Bench of the Tribunal after placing reliance on the decision of Hon'ble Jurisdictional High Court in the case of PCIT vs. Godrej Industries (supra) allowed the claim of the assessee. 9.1 The ld. Departmental Representative has not been able to controvert the findings of Co-ordinate Bench of the Tribunal on this issue in assessee's own case. We find no reason to take a different view, hence, following the decision of the Tribunal in assessee's own case in the immediate preceding assessment year, ground No.3 of the appeal is allowed in similar terms.

50 & 1248/Mum/2017 M/s Grasim Industries Limited assessment years we hold ESOP expenditure as revenue in nature. The ground No.5 of the appeal is allowed for parity of reasons. 65. We notice that the facts for the year under consideration are identical and therefore we see no reason to take a different view on the impugned issue. Accordingly we dismissed the ground raised by the Revenue.

We have heard the rival submissions and perused the material before us.We find that the Lucknow Tribunal has discussed and decided the issue of catalyst in following manner: "5. Coming to the disallowance of claim of deduction of Rs.45,64 595/- towards expenditure on catalysts it was claimed that the issue was decided in assessee's favour and the matter was before the High Court for the Asses merit Year 1997-98. It was further submitted that irrespective of the fact that whether the expenditure is held to be revenue or capital, it is not in dispute that the spares and catalysts were a passive or active use during the whole of the year. U/s.32 only two conditions are to be fulfilled for allowing depreciation i.e., (a) ownership and (b) its use for the purpose of business. According to the proviso to Section 32, depreciation is to be restricted to 50% if it was acquired during the previous year and put to use for a period of less than 180 days. The assessee was not coming under the limitation according to the proviso. 6. the assessee further submitted that in fact the assessee had made the written submission running to 43 pages which, among other details contained the date of purchase, commercial description of the spare, number of pieces and total value against a particular entry. Out of the total spares for the financial year 1995-96, items that cost less than Rs.5,000/- totaled to Rs.45,30,617/-. The assesse also furnished a copy of vouchers/bills covering value of Rs.l,05,93,876/-. Originals were also submitted for verification. It was claimed that all the purchases of the spare parts were debited to 51 & 1248/Mum/2017 M/s Grasim Industries Limited inventory. It was submitted that the actually none of the spare parts were drawn from stores for consumption by the plant engineers. They were being carried forward from year to year in the inventory. During the year under consideration, ICAI came out with the interpretation of AS-2 which insisted relisting of spares. The question of taxability of amount as revenue has arisen only because of the reason of a distinct treatment for the purpose of accounting and taxation. While in the financial accounts such value has been capitalized for the purpose of taxation, it was being claimed as expense. Capitalisation was done on the basis of binding directives of ICAl Many of the spares were procured as back as 1986 but capitalized now because of the change in the accounting standards. The assessee relying on the decision of the Hon'ble Supreme Court in the case of Kedarmath Jute Mfg. Co. Ltd., v. Commissioner of Income-tax (1971) 82 ITR 363, contended that entries in the books of account cannot be decisive or conclusive, for determining the taxability of income. The assessee contended in the light of the decision of the jurisdictional High Court in the case of Anil Bulk Carriers P. Ltd. v. Commissioner of Income tax(2005) 276 ITR 625 and in the case of Commissioner of Income tax v. Swarup Vegetable Products India Ltd., (2005) 277 ITR 60, on the subject to depreciation in the value due to passage of time is to be recognized. 21.Coming to the objection of the revenue that spares and catalysts were carried forward from year to year and by the year 2002-03, it had lost its commercial value and therefore, the claim was without merit. The learned AR's submission that the capitalization was done by the assessee only because of the prescription of the ICAI with regard to the change of the accounting standard is to be accepted. The counsel's objection that the reliance placed by the revenue on the decision of the Delhi High Court in Delhi Tourism and T.D.C. Ltd. v. Commissioner of Income- tax (2006) 285 ITR 114 is distinguishable on facts. In the case before the Hon'ble Delhil High Court, the High Court held that since the electricity charges for the electricity consumed were a known expenditure to the assessee, the assessee, on the basis of average could make a provision for this expenditure for every year of assessment even if no bill was received in a particular of assessment. As the assessee had failed to claim this expenditure in the earlier assessment year and having failed to discharge this duty of providing for a known expenditure, the assessee could not claim the electricity charges in the subsequent assessment years. Coming to the instant case of the assessee, on facts it is to be seen that the assessee changed the method and started capitalization of the spares and catalysts b cause of the change in the method of accounting standards as prescribed by the ICAI. Coming to the objection of the revenue as to how the spare parts were valued, it is always the case of 52 & 1248/Mum/2017 M/s Grasim Industries Limited the assessee that it was always valued at cost and it had never changed this method. One of the objection of the revenue was that there was no certificate nor evidence to show that these spa or catalysts had lost its commercial properties nor that the same had aged. At the time of hearing, we directed the assessee to produce certificate from the competent authority, which has now been placed on record. The revenue has again raised an objection on this.

23. We find that on a similar issue which was agitated before the Cuttack bench of the Tribunal in the case of National Aluminium Co. Ltd., (supra) the Tribunal held that the valuation taken of obsolescence loss at 20% of the historical cost cannot be said to be without any basis not it is improper. Consequentially, the claim of the assessee after three years, the Tribunal held, is to be allowed. The same decision on principle is applicable in the instant case of the assessee as well. The assessee capitalized these items on account of the change in the accounting standard prescribed by the ICAI. The objection by the revenue that the assessee should have claimed it in the earlier years, or the basis for claiming this during the year under consideration is because the assessee started making profit for the first time after amalgamation etc., is not sustainable. Even the assessee's counsel submitted before us that this was not the first year of profit making. Even before the amalgamation the company made the profit. It is true that after amalgamation also the assessee had positive income. We have to accept the assessee's contention that it was not the motive to reduce tax, but it was because of the change in the method accounting standard prescribed 53 & 1248/Mum/2017 M/s Grasim Industries Limited by the ICAI is a reason to be accepted in the absence of any evidence to the contrary.

23. In view of the above, we allow this ground taken by the assessee.

24. The next effective ground urged by the assessee before us is against the disallowance of interest u/s.244A on advance tax, being self assessment tax, without taking into consideration the fact as also the law that the phrase 'unless the context otherwise requires' used in the beginning of the definition means that the phrase 'advance tax' and also other phrases defined in section 2(1) are capable of more than one meaning, and as such, self assessment tax would be regarded as 'advance tax' that qualifies for interest uls.244A of the Act." Respectfully,following the above order we confirm the order of the FAA and decide ground no.2 against the AO.

54 & 1248/Mum/2017 M/s Grasim Industries Limited 70. Ground No.13 is with regard to CIT(A) allowing the claim of the assessee of sale of certified emission receipt. The ld AR submitted that this issue is also covered by the decision of the coordinate bench in assessee's own case for AY 2010-11 and facts being identical, the decision is squarely applicable for the year under consideration also. The ld AR drew our attention to the relevant observations of the coordinate bench as extracted below –

55 & 1248/Mum/2017 M/s Grasim Industries Limited The CIT(A) in the impugned Assessment Year granted relief to the assessee by following the order of his predecessor for assessment year 2009-10, which has now been confirmed by the Tribunal. Since, there has been no change in the facts in the Assessment Year under consideration, this ground of appeal by Revenue is dismissed for similar reasons.

71. Considering the fact that for the year under consideration CIT(A) granted relief relying on his own decision for the earlier years we dismiss the ground raised by the Revenue.

72. Revenue is contending the direction of the CIT(A) to treat interest subsidy from TUF as capital in nature through Ground No.14. Both the parties conceded that the issue is covered by the decision of the coordinate bench in assessee's case for AY 2010-11 where it has been held that –

40. Both sides heard. The assessee has received subsidy under TUF scheme. The assessee has claimed the subsidy as capital receipt, whereas, the Department treated the subsidy as Revenue in nature. We find that the Hon'ble Rajasthan High Court in the case of PCIT vs. Nitin Spinners Ltd.(supra) examined the scheme in the light of various decisions and held the subsidy under TUF scheme as capital in nature. Similar view has been taken by the Hon'ble Calcutta High Court in the case of CIT vs.Gloster Jute Mills Ltd.(supra). Thus, in view of above judgements of Hon'ble High Courts, we see no infirmity in the findings of CIT(A). The same are upheld and ground No.11 of the appeal is dismissed. 73. Considering that the fact for the year under consideration being identical we see no reason to interfere with the decision of the CIT(A). Accordingly the ground raised by the Revenue is dismissed.

74. Ground No.15 & 16 of the revenue pertain to CIT(A) restricting the ALP of guarantee fees in respect of corporate guarantee and performance given to AE to 0.5% as against 2.42% and 1.74% as held by AO/TPO. We have while considering Ground No.8 have already upheld the decision of the CIT(A) by 56 & 1248/Mum/2017 M/s Grasim Industries Limited placing reliance on the decision of the jurisdictional High Court in the case of Everest Kanto Cylinder Ltd (supra). Therefore these grounds of the revenue are dismissed.

Order pronounced in the open court on 28-12-2023.