DCIT- CC - 7(3), MUMBAI vs. ACG ASSOCIATED CAPSULES PVT. LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS. KAVITHA RAJAGOPAL, JM ITA Nos. 2383 & 2384/Mum/2018 (Assessment Years: 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. DCIT Central Circle – 7(3) 1001, Dalamal House, 10th Floor, Room No. 655, 6th Floor, Nariman Point, Mumbai -400 021 Vs. Aayakar Bhavan, M. K. Road, Mumbai -400 020

PAN/GIR No. AAACA 4769 K (Assessee) (Revenue) : & ITA Nos. 3282 & 3283/Mum/2018 (Assessment Years: 2012-13 & 2013-14) DCIT Central Circle – 7(3) ACG Associated Capsules Pvt. Ltd. Room No. 655, 6th Floor, 1001, Dalamal House, 10th Floor, Aayakar Bhavan, M. K. Road, Vs. Nariman Point, Mumbai -400 021 Mumbai -400 020

PAN/GIR No. AAACA 4769 K (Revenue) : (Assessee)

Assessee by : Shri Ketan Ved/ Shri Abdulkadir Jawadwala Revenue by : Shri Akhtar Hussain Ansari

Date of Hearing : 07.09.2023 Date of Pronouncement : 04.12.2023

O R D E R Per Kavitha Rajagopal, J M:

These are cross appeals filed by the assessee and the Revenue challenging the order of the learned Commissioner of Income Tax (Appeals) (‘ld.CIT(A) for short), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2012-13 and 2013-14 respectively.

2 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. 2. As the facts are identical in all the appeals, we hereby pass a consolidated order by

taking ITA No. 2383/Mum/2018 as a lead case for the sake of convenience.

ITA No. 2383/Mum/2018

gelatin capsules of various sizes and had filed its return of income dated 26.11.2012,

declaring total income at Rs.130,94,30,870/-. The assessee’s case was selected for

scrutiny and notice u/s. 143(2) and 142(1) of the Act were duly issued and served upon

the assessee. The source of income declared by the assessee is out of profit and gains of

business and profession and income from capital gains.

observed that the assessee has entered into the international transaction with its associated

enterprises (AE for short) as per Form No. 3CEB. The ld. A.O. made a reference to the

ld. Transfer Pricing Officer ('TPO' for short) vide letter dated 17.03.2015 u/s. 92CA(1) of

the Act for determining the arm's length price ('ALP' for short) of the international

transaction entered into by the assessee with its AE. The ld. TPO vide order dated

28.01.2016 passed u/s. 92CA(3) of the Act proposed the following TP adjustment,

mentioned as below:

Sr. No. Nature of TP adjustment Amount (Rs.) 1 Corporate guarantee fee 77,19,074

144C(3) of the Act by determining the total income at Rs.133,09,20,341/- after making

the various additions/disallowances along with the TP adjustment proposed by the ld.

TPO. The assessee has entered into the following international transactions:

3 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. Sr. Particulars Amount (Rs.) Method used Amount (Rs.) Method used no. Current year Preceding year 1 Export of empty hard 98,53,48,463/- TNM Method 76,72,60,795/- TNM Method gelatin capsules and cellulose capsules 2 Reimbursement of 1,09,54,512/- At Actuals 66,61,070/- At actuals expenses paid 3 Reimbursement of 75,37,378/- At Actuals 15,22,821/- At actual expenses received 4 Investments 4,86,42,080/- NA 81,173/- NA 5 Corporate Guarantee 40,73,40,000/- NA 37,94,40,000/- NA 6 Compensation for 35,39,443/- TNM Method 33,26,296/- TNM Method support services 7 Dividend 4,57,943/- CUP Method Nil NA 8 Liquidation of WOS and Euro CUP Method Nil NA investment in Equity and 59,35,000/- Preference share capital of ACG Lukapsd.o.o. 9 Lending of Money Nil NA 29,05,598/- NA 10 Commission on sales NIL NA 2,67,020/- TNM Method paid

CIT(A) challenging the various additions/disallowance made by the ld. A.O.

order of the ld. CIT(A).

adjustment on corporate guarantee given by the assessee on behalf of its AEs. The facts

of this ground are that the assessee company had given corporate guarantee aggregating

to Euro 6 million equivalent to Rs.40,73,40,000/- on behalf of its AEs namely ACG

Lukaps d.o.o, Croatia for availing various credit facilities from Zagrabacka Banka,

Croatia and City Bank, NA. It is also observed that the assessee had not bench marked

the said transaction for the reason that the same is not an international transaction and,

4 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. therefore, had not determined the ALP for the said transaction in its TP study report. The

assessee had contended that it had given corporate guarantee to foreign bank which does

not fall under the scope of international transaction and that the same would fall under the

international transaction only when the foreign subsidiary defaults in repaying the said

loan to the bank making the assessee liable for the said default. The assessee further

contended that the same would not be “provision of service” and it was only to increase

the value of the assessee’s investment in its subsidiaries and had not earned any income

out of the said transaction. The assessee further to this stated that without prejudice, to

consider the standard chartered bank as a comparable which had offered 0.7% for similar

guarantee.

of its AE comes under the purview of international transaction u/s. 92B read with

Explanation (1)(c) which is inserted with retrospective effect from 01.04.2002 by Finance

Act, 2012. The ld. A.O./TPO further held that the said transaction would have a greater

impact on the income and the assets of the assessee in case where the AE defaults the

payments to the banks. The ld. A.O/TPO relied on the decision of the co-ordinate bench

in the case of Everest Kanto Cylinders Ltd.(in ITA No. 542/Mum/2012 vide order dated

23.11.2012) and Nimbus Communication Ltd. (in ITA No. 3664 & 2359/Mum/2010) and

bench marked the transaction of corporate guarantee by applying cup method and by

rejecting the internal cup applied by the assessee @ 0.7%. The ld. A.O/TPO stated that

the bank rates for such guarantee varies from 0.7% to 3% where the lowest rate of

commission is charged on entities having higher credit rating and highest commission is

5 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. charged on entities having less credit rating and thereby determined the guarantee

commission @ 1.75% and worked out the ALP at Rs.77,19,074/-.

an international transaction as per the amendment to section 92B(2) of the Act with

retrospective effect from A.Ys. 2002-03 as per Finance Act, 2012. The ld. CIT(A) further

held that the ld. A.O./TPO has determined the interest rate without considering the fact

that the assessee has given guarantee for its own subsidiary and the ld. A.O./TPO has

erred in determining the rate of loan of unsecured bonds which is not the assessee’s case

here. The ld. CIT(A) further held that the rate ranged from 1.75% to 2% where the AE

could have borrowed funds at even 2% where the guarantee commission rate given have

been 2.5%. The ld. CIT(A) determined the rate at 0.70% based on the assessee’s reliance

on the standard chartered bank rate to be reasonable for the impugned transaction.

order of the ld. CIT(A).

contended that the transaction of giving corporate guarantee to its AE would not fall

under the purview of the international transaction as there was no income element

involved in the transaction and that the assessee was benefited since it was the assessee

who was getting the benefit out of the said transaction, the AE were not charged by the

assessee for providing guarantee. The ld. AR further contended that the assessee has not

received any charges for giving such guarantee commission and even otherwise it was for

6 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. direct or indirect commercial interest of the assessee. The ld. AR relied on the decision of

the Hon'ble Apex Court in the case of SA Builders vs. CIT (288 ITR 1). The ld. AR

further contended that the assessee has not received any income out of the said

transaction and the same would not be categorized as an international transaction.

controverted the said fact and relied on the various decisions which has held the

transaction of corporate guarantee on behalf of the AE to be an international transaction.

The ld. DR further stated that the ld. CIT(A) has erred in determining the ALP @ 0.70%

without taking into consideration the credibility of AEs and the risks involved in the said

transaction when the AE defaults the repayment of the loan for which the assessee has

given corporate guarantee to the banks. The ld. DR relied on the order of the ld.

A.O./TPO.

record. It is evident that the issue of corporate guarantee commission by the assessee to

its AEs was dealt with by the Tribunal in A.Y. 2008-09 in ITA No. 2750/Mum/2014

where the Tribunal has restricted the corporate guarantee commission @ 0.5% by relying

on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Everest

Kento Cylinders [2015] 378 ITR 57 (Bom). It is also pertinent to point out that the issue

of the impugned transaction whether an international transaction falling within the

meaning of section 92B of the Act has also been dealt with by the Tribunal holding the

said transaction to be an international transaction. The ld. DR relied on the decision in the

case of Glenmark Pharmaceuticals Ltd. (in ITA No. 5031/Mum/2012 vide order dated

7 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. 13.11.2013) and stated that the ld. CIT(A) has failed to look into the credit rating of the

AEs and has also failed to evaluate the risk factor involved by the assessee in providing

the corporate guarantee on behalf of its AE. On considering the rival submissions it is

observed that the corporate guarantee given by the assessee on behalf of its AE for

availing loan facility is for the purpose of reducing the interest rate charged by the banks

and while determining the ALP of the said transaction the same has to be considered on

the perspective of the benefit received by the AE as per the interest saving approach by

reason of the corporate guarantee given by the assessee and to compare the same as to

what would be the interest rate charged by the bank for the loan availed by the AEs if the

corporate guarantee is not given by the assessee for availing the said loan. It is observed

that both the lower authorities have failed to look into this issue before determining the

ALP of the said transaction. Reliance placed on the decision in the case of Hon'ble

Jurisdictional High Court in the case of Everest Kento Cylinders (supra) cannot be the

basis for holding the corporate guarantee commission to be 0.5% which was held to be an

appropriate rate by the Hon'ble High Court in case of that assessee and for that particular

year under consideration. It is evident that 0.5% cannot be a standard rate for charging

corporate guarantee commission and the same has to be determined in each case and for

each year based on the credit rating of AE, comparable loan transactions where

guarantees are issued and non guaranteed loans by working out interest saving and then

sharing it between transacting parties. We, therefore, direct the ld. A.O./TPO to

determine the ALP on corporate guarantee commission on the basis of the interest saving

approach of the said transaction. The assessee is also directed to bench mark the said

transaction where it has already been held to be an international transaction and on the

8 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. basis of which the ld. A.O./TPO has to determine the ALP of the corporate guarantee

commission as per the provisions of section 92CA of the Act which makes it compulsory

to benchmark the international transactions every year. Exception may be if no

significant difference between FAR or economic circumstances exists. We, therefore,

remand this issue back to the ld. A.O. on the above observation. Hence, ground nos. I &

II of the assessee’s appeal are allowed for statistical purpose.

Rules amounting to Rs.53,72,465/-. The facts of this ground is that the assessee had

earned exempt income as dividend amounting to Rs.2,48,02,871/- as share of profit from

partnership firm and had made a suo moto disallowance of Rs.13,10,845/- u/s. 14A read

with Rule 8D of the Rules. The ld. A.O. observed that the assessee has computed the

disallowance without considering the investment in the group concerns on the pretext that

the same are strategic investments where the assessee has invested in the capital of the

firms in which the share of profit received by the assessee has been claimed as exempt

u/s. 10(2A) of the Act. The ld. A.O. by relying on the decision of Special Bench of the

Tribunal in the case of Cheminvest Ltd. vs. ITO [2009] 121 ITD 318 (Del) (SB) and the

CBDT Circular No. 5/2014 dated 11.02.2014 held that even in case where the assessee

has not earned exempt income, the expenditure related to the earning of such income has

to be disallowed. The ld. A.O. also relied on the decision of the Tribunal in the case of

Asst. CIT vs. Nimbus Communications Ltd. [2014] 30 ITR (T) 349 and the decision of

Kolkata Tribunal in the case of Coal India Ltd. (in ITA No.1032 & 1238/Kol/2012 vide

order dated 13.05.2015), wherein it was held that section 14A disallowance is applicable

9 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. even in case of investments made in subsidiary companies. The ld. A.O. computed the

disallowance u/s. 14A read with Rule 8D at Rs.66,83,290/-.

made by the ld. A.O.

companies are strategic investments which should not be considered for computing the

disallowance under Rule 8D(2)(iii) of the Rules. The ld. AR relied on a catena of a

decision which are in favour of the assessee. The ld. AR further without prejudice

contended that the disallowance u/s. 14A be restricted to suo moto disallowance made by

the assessee and as per the provision of section 14A read with Rule 8D of the Rules.

exempt income earned by the assessee by way of dividend income as share of profit from

partnership firm should be considered as those eligible for computing disallowance u/s.

14A read with Rule 8D of the Rules. The ld. DR further contended that the investment in

the subsidiary companies should also be considered for the purpose of computing the

disallowance u/s. 14A of the Act. The ld. DR relied on the decision of the Special Bench

of the Tribunal in the case of Cheminvest Ltd. (supra). The ld. DR relied on the order of

the lower authorities.

record. It is observed that the assessee has earned dividend income amounting to

10 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. Rs.2,48,02,871/- as share of profit from the partnership firm and the assessee has made a

suo moto disallowance of Rs.13,10,825/-. The lower authorities have relied on the

decision of the co-ordinate bench in the case of Nimbus Communication Ltd. (supra) and

the Kolkata Tribunal decision in the case of Coal India Ltd. (supra) wherein it was held

that even in case of investment made in the subsidiary companies disallowance u/s. 14A

is attracted. The contention of the assessee that these are strategic investment made in

sister concerns for which it should not be included in computing the average value of the

investments for the purpose of Rules 8D(2)(iii) of the Rules, does not hold merit as per

the proposition laid down by the Hon'ble Apex Court in the case of Maxopp Investment

Ltd. vs. CIT (in Civil Appeal Nos. 104-109 of 2015 vide order dated 12.02.2018). It is

also pertinent to point out that as per the decision of the Special Bench of Ahmedabad

Tribunal in the case of Shri Vishnu Anant Mahajan vs. ACIT (in ITA No.

3002/Ahd/2009) which held that the investments made in the partnership firms are also to

be considered for computing the disallowance under Rule 8D of the Rules. We are not in

agreement with the view of the Revenue in relying on the decision of ITAT in the case of

Cheminvest Ltd. (supra) as the same has been reversed by the Hon’ble Delhi High Court.

disallowance to the extent of investment which has yielded in earning of the exempt

income and not those investments where the assessee has not earned any exempt income

for the purpose of computing the disallowance u/s. 14A read with Rule 8D. For this, we

place reliance on the decision of the Special Bench of ITAT Delhi in the case of ACIT vs.

Vireet Investments Pvt. Ltd. 165 ITD 27 (Trib-Del). We, therefore, remand this issue back

11 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. to the file of the ld. A.O. for recomputing the disallowance u/s. 14A read with Rule 8D to

the extent of the investments made by the assessee which has resulted in earning of the

exempt income. Hence, ground no. III raised by the assessee is partly allowed.

ITA Nos. 3282/Mum/2018 (A.Y. 2012-13)

CIT(A) on the following grounds:

1 "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) justified in allowing the additional depreciation of Rs. 83,97,933/- to the assessee for the F.Y. 2011-12 despite the fact that the explicit provision for the deduction for the balance 50% of the amount has been introduced in the I T Act vide third proviso to subsection (l) of section 32 with effect from 01.04.20l6. prospectively and not retrospectively. 2 "The Ld. CIT(A) erred in reducing rate of corporate guaramtee commission chargeable from 1.75% to 0.7%, merely holding the transaction as fair and reasonable, without appreciating the fact that the Act specifically discusses each and every method including the Other Method to compute the ALP, and ALP cannot be determined considering a transaction to be fair and reasonable?" 3 "The Ld. CITA) erred in reducing rates of corporate guarantee commission chargeable from 1.75% to 0.7% based on a quotation produced by the assessee from Standard Chartered Bank ignoring the material differences between the two namely (i) that it pertained to a different financial year and (ii) was issued not to the AE but to the assessee, and there would be substantial difference in the rates of commission charged/chargeable to the assessee and the AE due to their differential credit ratings? 27. During the appellate proceeding, the ld. AR for the assessee stated that this appeal

would be covered under the low tax effect as per the CBDT Circular No. 17 of 2019

dated 08.08.2019.

12 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd.

record. As this appeal filed by the Revenue would be covered under the low tax effect

vide CBDT Circular No. 17 of 2019 dated 08.08.2019, we deem it fit to dismiss the said

appeal with the liberty given to the Revenue to restore the appeal if in case the same

would fall under the Exception to the said Circular.

ITA No. 2384/Mum/2018 (A.Y. 2013-14)

on various grounds.

ground nos. I & II of ITA No. 2383/Mum/2018 and the observation given in the said

appeal applies mutatis mutandis to this ground of appeal also.

has been decided in ground no. III of ITA No. 2383/Mum/2018 and the observation given

in the said appeal applies mutatis mutandis to this ground of appeal also.

A.O. observed that the assessee has availed external commercial borrowings (ECB) and

temporary surplus of such borrowings were deposited in bank fixed deposit out of which

13 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. the assessee has earned an interest of Rs.7,55,68,354/- and in that Rs.6,17,98,074/- was

netted of against the interest expenses which was capitalized. The ld. A.O. had show

caused the assessee for taxing the said interest income as income from other source u/s.

56 of the Act. The assessee contended that the external commercial borrowings was to be

used only for the purpose of building of factory and plant and machinery as per the

agreement and the same has to be capitalsed and the interest out of the said borrowed

fund should also be capitalized as per the provision to section 36(1)(iii) of the Act from

the date of borrowal till the date on which the asset was put to use. The assessee further

contended that it was paying interest on the said funds which were deposited and had also

offered Rs.1,37,70,280/- out of the total interest to the tax which was credited in the

profit and loss account as “Note 21 – other income”. The assessee has netted off the

balance interest cost which is capitalized to the cost of the project. The assessee relied on

the decision of Indian Oil Panipat Power Consortium Ltd. vs.ITO [2009] 20 DTR 107

(Del) and the decision of the tribunal in the case of Whistling Woods International Ltd.

vs. ITO (in ITA No. I.T.A.NOs.4662/Mum/2007 & 1394/Mum/2008 vide order dated

18.06.2010), wherein it was held that if income from temporary investments would be

taxed as income from other sources u/s. 56, then the interest on such deposits should be

allowed as deduction u/s. 57 of the Act. The ld. A.O. not satisfied with the assessee’s

contention held that the assessee has failed to prove the nexus of the borrowed funds to

the temporary funds which had earned interest income and even otherwise if it was from

the loans availed for purchasing of plant and machinery for SEZ unit, which has not

commenced operation and is a distinct unit, the interest ought to be taxed as income from

other sources, as the same is revenue in nature. The ld. A.O. relied on the decision of the

14 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT

141 CTR 387 (SC), which has held that interest out of the short term investment of funds

borrowed for setting up of factory has to be assessed as income from other sources until

the commencement of the business. The ld. A.O. added the interest income u/s. 56 of the

Act and the corresponding adjustment is made as work-in-progress under fixed assets.

impugned addition made by the ld. A.O. and the ld. CIT(A) by relying on the deision of

the co-ordinate bench of the Tribunal in the case of M/s. Z Square Shopping Mall Pvt. Vs.

DIT [2016] 65 Taxmann.com 139 (LKW Tribunal) and various other decisions upheld

the addition made by the ld. A.O. on the interest income u/s. 56 of the Act.

contended that the assessee had availed ECB for setting up for new plant as SEZ unit at

Pitampur, Madhya Pradesh which has not commenced its operation during the year under

consideration and that the borrowed fund has been temporarily parked in the bank fixed

deposit for which the assessee has also paid interest on the said loan amount. The ld. AR

relied on the decision of the Delhi High Court in the case of Indian Oil Panipat Power

Consortium Ltd. (supra) and Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra)

wherein it was held that the interest income out of the borrowed funds deposited in the

bank for the purpose of setting up of business or for specific purpose of acquiring land

and development of infrastructure for the assessee’s business has to be capitalized and the

15 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. same if is to be treated as revenue receipt then the corresponding expenditure is to be

allowed u/s. 57 of the Act.

decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and

Fertilizers Ltd. (supra) which held that interest earned out of the fixed deposits from the

surplus borrowed funds, the interest earned out of it should be taxed under the head

income from other sources. The ld. DR further contended that the assessee has failed to

prove that the funds parked in the fixed deposits are ‘inextricably linked’ to the set up of

the plant and, therefore, the lower authorities have added the same u/s. 56 of the Act as

revenue receipt. The ld. DR relied on the order of the lower authorities.

record. It is observed that the assessee has availed external commercial borrowings from

banks for the purpose of setting up of a new plant and had temporarily parked the surplus

of such borrowing in the bank’s fixed deposits out of which the assessee has earned

interest income of Rs.7,55,68,354/- and had offered Rs.1,37,70,280/- to tax after netting

off the interest expenses amounting to Rs.6,17,98,074/- which was capitalized by the

assessee. The Revenue’s contention is that the same is revenue receipt and not a capital

receipt which has to be taxed u/s. 56 of the Act. The Revenue placed strong reliance on

the decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and

Fertilizers Ltd. (supra) and the assessee has relied on the decision of Delhi High Court in

the case of Indian Oil Panipat Power Consortium Ltd. (supra) and Pr. CIT vs. Triumph

Realty (P) Ltd. [2023] 148 taxmann.com 196 (Del) along with other decisions. The moot

16 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. question here would be whether the interest earned out of the surplus borrowed fund in

the fixed deposit would be a capital receipt or revenue receipt. The Hon’ble Delhi High

Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) has dealt with the

Hon'ble Apex Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers

Ltd. (supra) and has also relied on the decision of the Hon'ble Apex Court in the case of

CIT vs. Bokaro Steels Ltd. [1999] 236 ITR 315 (SC) where if the assessee was able to

prove that the funds are inextricably linked to the set up of the plant then the same would

be capitalized as preoperative expenses. The assessee draws support from the said

decision which has held that the interest income out of the temporary funds has to be

capitalized and not to be taxed under the head ‘income from other sources’. In the present

case in hand, we do not find any observation by the lower authorities as to how the

borrowed fund and the surplus amount parked in the fixed deposits are not ‘inextricably

linked’ to the setting up of the new unit by the assessee. In the absence of such

observation and by placing reliance on the decision cited by the assessee we hold that the

interest income out of the fixed deposits which is made from the ECB has to be

capitalized as capital receipt and not revenue receipt. The relevant extract of the decision

of the Hon'ble High Court in the case of Indian Oil Panipat Power Consortium Ltd.

(supra) is cited hereunder for ease of reference:

17 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. „surplus‟ and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head "income from other sources‟. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise „inextricably linked‟ to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in Section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of Section 4 of the Act which is the charging Section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under Section 14 in Chapter IV of the Act. For an income to be classified as income under the head "profit and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd vs CIT & Excess Profits Tax; (1958) 34 ITR 368 (SC), and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax; (1954) 26 ITR 765 (SC). Once it is held that the assessee‟s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure - then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head „income from other sources". It is well-settled that an income received by the assessee can be taxed under the head "income from other sources" only if it does not fall under any other head of income as provided in Section 14 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC). 5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were „surplus‟ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as „income from other sources‟. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be „inextricably linked‟ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses. 6. There is another perspective from which the present issue can be examined. Under Section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in Section (2) to (7) of Section 208. This section was specifically noted by the Supreme Court in Challapalli

18 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. Sugars Ltd vs CIT (1975) 98 ITR 167. The Supreme Court went on to observe at page 175 as follows: "We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub- Section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses." 6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized. 7. In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals (supra) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the Revenue. These appeals are allowed and the impugned judgment is set aside. 40. On the above observation, we are inclined to allow ground no.IV raised by the

assessee.

travelling of Director’s relative. The ld. AR submitted that this ground of appeal raised by

the assessee is not pressed and, therefore, ground no. V raised by the assessee is

dismissed.

partly allowed.

19 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. ITA No. 3283/Mum/2018 (A.Y. 2013-14)

CIT(A) in allowing the additional deposit of Rs.1,26,46,017/- despite the fact that the

explicit provision for deduction of the balance 50% of amount has been introduced in

Income Tax Act vide third proviso to sub section (1) of section 32 which is w.e.f

01.04.2016 is to be applied prospectively and not retrospectively and challenging the

adjustment made towards corporate guarantee commission by the ld. CIT(A) restricting

the same to 0.7% as against the adjustment made by the ld. A.O./TPO @ 2.58%.

is observed that the assessee has claimed balance additional deposits of Rs.1,26,46,017/-

on the new plant and machinery put to use for less than 180 days during the previous

year, i.e., A.Y. 2012-13 by relying on the decision of the co-ordinate bench in the case of

DCIT vs. Cosmo Films Ltd. (24 Taxman 189). The assessee has also relied on the

decision of the Hon’ble Karnataka High Court in the case of M/s. Rittal India Pvt. Ltd. vs.

ACIT (2016-TIOL-180-HC-KAR-IT).

machinery or plant (other than ships and aircrafts) which is acquired and installed after

31.03.2005 and the assessee should have been engaged in the business of manufacturing

or production of any article or not. The assessee in the present case is engaged in the

manufacturing of empty hard gelatin capsules of various sizes and had claimed 50% of

the additional depreciation for plant and machinery which was purchased and put to use

for less than 180 days during the financial year 2011-12. The ld. A.O. held that the

20 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. additional depreciation is to be restricted as per the second proviso to section 32(1)(ii) of

the Act which restricts the claim of additional depreciation to ½ the amount otherwise

allowable and in the absence of the explicit provision, the balance 50% of the additional

deprecation would lapse. The ld. A.O. relied on the decision of the co-ordinate bench of

the Tribunal in the case of DCIT vs. Brakes India Ltd. (in ITA No. 1069/Mds/2010). The

ld. A.O. further held that the explicit provision applies 50% of the said claim was

introduced by Finance Act, 2015 which is w.e.f. 01.01.2016 vide third proviso to sub

section (1) of section 32 and since the said provision is applicable prospectively, the

assessee’s claim of additional deprecation was disallowed by the ld. A.O. The ld. CIT(A),

on the other hand, allowed the additional claim of depreciation by relying on the decision

of Hon’ble Karnataka High Court in the case of M/s. Rittal India Pvt. Ltd. 380 ITR 423

(Kar).

record. As this issue has been squarely covered by the decision of the Hon'ble

Jurisdictional High Court in the case of CIT vs. Rashtriya Chemicals and Fertilizers Ltd. (in ITA No. 1861 of 2017 vide order dated 26.10.2021), wherein it was held that the 3rd

proviso to clause (ii) of sub section (1) of section 32 of the Act being clarificatory in

nature would apply to previous years also. The relevant extract of the said decision is

cited hereunder for ease of ready reference:

21 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. Court in Commissioner of Income Tax vs. T. P. Textiles Pvt. Limited, 3 wherein Madras High Court has considered the additional proviso which was inserted to Section 32(1) (iia) of the Act and has also concurred with the view of the Madras High Court that said newly added third proviso to clause (ii) of subsection 1 of Section 32 of the Act being clarificatory in nature would apply to case covering past period also. Paragraph 5 to 10 of Godrej (supra) reads as under: "5 Having heard Counsel for the Revenue and for the Assessee, we notice that the Assessee's claim of additional depreciation arises out of clause (iia) of subsection 1 of Section 32 of the Act. Clause (ii) of sub-section 1 of Section 32 of the Act recognizes the depreciation on block of assets. Clause (iia) grants additional depreciation in case of acquisition and installation of new machinery or plant by an Assessee after 31st March, 2005, the Assessee being engaged in business of manufacture or production of an article or things. 6 We may also notice that the second proviso to clause (ii) of sub-section 1 of Section 32 of the Act, would restrict Assessee's claim of depreciation to 50% in case, the assets are acquired by the Assessee during the previous year and put to use for the purposes of business or profession for a period less than 180 days in the said previous year. 7 In the context of such statutory provisions, the Revenue has raised the question – whether when 50% of the additional depreciation is claimed by the Assessee in a particular Assessment Year, since the acquisition and putting in to use of the assets in the previous Year was for less than 180 days, the Assessee can claim the remaining depreciation in the subsequent Assessment Year. Such a question came up for consideration before the Division Bench of Karnataka High Court in Commissioner of Income Tax and Another v/s. Rittal India Pvt. Ltd., reported in 380 ITR 423. The Court, after referring to the statutoryprovisions, held and observed in para 8 as under:- “8:- The aforesaid two conditions, i.e., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been done away by substituting clause (iia) with effect from April 1, 2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purposes of business. The proviso to clause (ii) of the said section makes it clear that only 50 per cent of the 20 per cent would be allowable, if the new plant and machinery so acquired is out to use for less than 180 days in a financial year. However, it nowhere restricts that the balance 10 per cent would not be allowed to be claimed by the assessee in the next assessment year. The language used in clause (iia) of the said section clearly provides that “a further sum equal to 20 per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)”. The word “shall” used in the said clause is very significant. The benefit which is to be granted is 20 per cent additional depreciation. By virtue of the proviso referred to above, only 10 per cent can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10 per cent additional deduction can be availed of in the subsequent assessment year, otherwise the very purpose of insertion of clause (iia) would be defeated because it provides for 20 per cent deduction which shall be allowed. It has been consistently held by this Court, as well as the apex court, that the beneficial legislation, as in the present case, should be given liberal

22 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one assessment year, if certain condition was not fulfilled. But,that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held, that additional depreciation allowed under Section 32(1) (iia) of the Act is a one-time benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. We are in full agreement with such observations made by the Tribunal.

In view of the aforesaid, we do not find that any interference is called for with the order of the Tribunal, or that any question of law arises in this appeal for determination by this court.” After the said judgment of the Karnataka High Court in Rittal India Pvt. Ltd., (supra), legislation has also amended the statutory provisions by adding the third proviso to clause (ii) of sub-section 1 of Section 32 of the Act, which reads as under:- “ Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset.” 8 The third proviso, thus, now recognizes the right of an Assessee to claim the remaining 50% depreciation in subsequent year in a case where machinery and plant being acquired and put to use for less than 180 days in the previous year, the depreciation was restricted to 50%. Such a situation as in the present case, was considered by the Division Bench of the Madras High Court in Commissioner of Income Tax v/s. Shri T. P. Textiles Pvt. Ltd., 394 ITR 483, the Court referred to the judgment of the Karnataka High Court in Rittal India Pvt. Ltd., (supra) as well as the addition of third proviso to clause (ii) of subsection 1 of Section 32 of the Act and observed as under: “10.1: The plain language of section 32(1)(iia) read along with relevant proviso would have us come to the conclusion that, there is no limitation in the assessee claiming the balance 10 per cent of additional depreciation in the succeeding assessment year. 10.2:- As a matter of fact, with effect from April 1, 20916, the ambiguity, if any, in this regard, in the mind of the Assessing Officer, stands removed by virtue of the Legislature, incorporating in the Statute, the necessary clarificatory amendment. 10.3 .... .... .... .... .... .... ....

11: We may only indicate that during the course of the arguments, our attention was drawn to the “Memorandum explaining the provisions in Finance Bill, 2015” whereby, the aforementioned amendment was brought about. 11.1: The relevant part of the memorandum is extracted hereafter:

23 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd.

“.... To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50 per cent of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year. This amendment will take effect from 1 st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.” 11.2:- A perusal of the extract of the memorandum relied upon would show that the legislature recognized the fact that the manner in which the Revenue chose to interpret the provision, as it stood prior to its amendment would lead to discrimination, in respect of plant and machinery, which was used for less than 180 days, as against that, which was used for 180 days or more itxa-511- 2016 11.3:- In our opinion, as indicated above, the amendment is clarificatory in nature and not prospective, as is sought to be contended by the Revenue. The memorandum cannot be read in the manner, in which, the Revenue has sought to read it, which is, that the amendment brought in would apply only prospectively. 11.4:- We are, clearly, of the view that the memorandum, which is sought to be relied upon by the Revenue, only clarifies as to how the unamended provision had to be read all along. 11.5:- In any event, in so far as the court is concerned, it has to go by the plain language of the unamended provision, and then, come to a conclusion in the matter. As alluded to above, our view, is that, upon a plain reading of the unamended provision, it could not be said that the assessee could not claim balance depreciation in the assessment year, which follows the assessment year, in which, the machinery had been bought and used, albeit, for less than 180 days.” 9 It could be thus, to seen that the Karnataka High Court in Rittal India Pvt., Ltd.,(supra) even without the aid of the statutory amendment held that remaining 50% unclaimed depreciation would be available to the Assessee in the succeeding Assessment Year. Now the legislation has amended the provision by adding a proviso which, specifically recognizes the said right. The Madras High Court in Shri T. P. Textiles Pvt. Ltd., (supra) ruled that such proviso being clarificatory in nature, would apply to pending cases, covering past period also. 10 We have no reason to take view different from two High Courts, examining the situation at considerable length. In the result, no question of law arises." 6. We have no reason to take a different view from the view expressed by our own High Court. In our view, ITAT has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raised any substantial question of law.

entitled to the additional depreciation claimed u/s. 32(1)(ii) of the Act and, therefore, find

24 ITA Nos. 2383 & 2384/M/18 and 3282 & 3283/M/18 (A.Ys. 2012-13 & 2013-14) ACG Associated Capsules Pvt. Ltd. no infirmity in the order of the ld. CIT(A). Ground no. 1 raised by the Revenue is

dismissed.

issue has been decided by us in ground nos. I & II of ITA No.2383/Mum/2018. The

observation in that applies mutatis mutandis to this ground also.

Order pronounced in the open court on 04.12.2023.

Sd/- Sd/-

(Prashant Maharishi) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 04.12.2023 Roshani, Sr. PS

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT - concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai