9911796707
TMI Blog2014 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... out that DRP misconstrued the provisions of section 32(1)(iia) of the Act and rejected the claim of the assessee on the ground that there is no provision for carry forward of any additional depreciation. According to the ld.senior counsel, this is not a carry forward of additional depreciation; but a claim made by the assessee during the year under consideration. Referring to provisions of section 32(1)(iia) of the Act, the ld.senior counsel submitted that in case of any machinery or plant acquired and installed after 31-03-2005 the assessee is entitled for a further sum equal to 20% of the actual cost of the plant & machinery installed as additional depreciation. This section 32(1)(iia) does not say the year in which the additional depreciation has to be allowed. It simply says that the assessee, who is engaged in the business of manufacture or production of articles or thing has acquired and installed machinery and plant after 31- 03-2005 is eligible for additional depreciation of a further sum equal to 20% of the actual cost. The further sum of 20% of the actual cost may be allowed either in the year in which the plant or machinery was acquired and installed or in the subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is eligible for depreciation @20%, in the absence of any specific provision, the assessing officer cannot cut down the scope of deduction by referring to proviso to section 32(1)(ii) of the Act. According to the ld.senior counsel, even if there is any contradiction between sections 32(1)(iia) and proviso to section 32(1)(ii), it has to be reconciled so as to give harmonious effect to the legislative intent. The benefits conferred on the assessee by way of incentive provision cannot be taken away by adopting an implied meaning to second proviso to section 32(1)(ii) of the Act. Since the second proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50% depreciation in the subsequent year, proviso to section 32(1)(ii) shall not be interpreted to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. According to the ld.senior counsel, when the main provision which allows depreciation @20% and does not prescribe any particular year in which it has to be allowed, the intention of the legislature is to allow entire additional depreciation @20%. The second proviso to section 32(1)(ii) is to mean that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii): Provided that no deduction shall be allowed in respect of - (A) Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) Any office appliances or road transport vehicles; or (D) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year." 10. We have also carefully gone through the Second Proviso to section 32(1)(ii) of the Act, which reads as follows: "Provided further that where an asset referred to clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(1)(ii) of the Act. 12. This issue was considered by the Delhi Bench of this Tribunal in the case of Cosmo Films Ltd (supra). The revenue has taken a similar ground as taken before this Tribunal that the assessee cannot carry forward the additional depreciation to be allowed in the subsequent assessment year. The Delhi Bench of this Tribunal after considering the provisions of section 32(1)(iia) and proviso to section 321)(ii) of the Act found that when there is no restriction in the Act to deny the benefit of balance 50%, the assessee is entitled for the balance additional depreciation in the subsequent assessment year. In fact, the Delhi Bench of this Tribunal has observed as follows at pages 641 and 642 of the ITD: "......Thus, the intention was not to deny the benefit to the assessees who have acquired or installed new machinery or plant. The second proviso to section 32(1)(ii) restricts the allowances only to 50% where the assets have been acquired and put to use for a period less than 180 days in the year of acquisition. This restriction is only on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SIL Investment Ltd (supra). At page 233 of the TTJ, the Tribunal has observed as follows: "40. There is nothing on record to show that the directions given by the learned CIT(A) are not proper. The eligibility for deduction of additional depreciation stands admitted, since 50 per cent thereof had already been allowed by the AO in the asst.yr.2005-06, i.e. the immediately preceding assessment year. Therefore, obviously, the balance 50 per cent of the deduction is to be allowed in the current year, i.e. asst.yr. 2006-07. The learned CIT(A) has merely directed the verification of the contentions of the assessee and to allow the balance additional depreciation after such factual verification. Accordingly, finding no merit therein, ground No.3 raised by the Department is rejected." 14. A similar view was taken by Mumbai Bench of this Tribunal in MITC Rolling Pvt Ltd (supra). In view of the above decisions of the co-ordinate benches of this Tribunal on identical set of facts this Tribunal is of the considered opinion that the balance 50% of the depreciation has to be allowed in the subsequent year, therefore, the orders of the lower authorities on this issue are set side and the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 17. On the contrary, Shri M. Anil Kumar, the ld.DR submitted that the assessee claimed expenditure of Rs. 1,29,71,451 u/s 35D of the Act. According to the ld.DR, section 35D is available only in respect of initial setting up or in connection with setting up of a new industrial undertaking and not for meeting the expenditure incurred for expansion of business. According to the ld.DR, the assessee claimed before the assessing officer and DRP that the expenditure was incurred during the course of business for the purpose of working capital of the company. Since the assessee claimed before the lower authorities that the expenditure was incurred in the course of business and funds were raised for meeting the working capital of the company, according to the ld.DR, section 35D has no application at all. 18. We have considered the rival submissions on either side and also perused the material available on record. The assessee now claims that expenditure was incurred for issue of shares to Qualified Institutional Buyers and fees paid to Registrar of Companies. Therefore, it has to be amortised for five years and 1/5th of the amount shall be allowed during the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to the ld.representative, Gujarat Perstop Electroniks Ltd was declared as a sick company by the BIFR. Therefore, a sum of Rs. 4.66 crores being 90% of the total investment in the equity shares of Gujarat Perstop Electroniks Ltd was written off by the assessee during the year 2002-03. Referring to page 399 of the paper book, the ld.senior counsel submitted that in the Board of Directors meeting held on 26-06-2002 it was decided to write down 90% of the existing equity due to accumulated losses. The balance 10% of the investment being 51.8 lakhs was written off during the year under consideration. According to the ld.representative 90% of the investment was held to be allowable as loss incidental to business by this Tribunal for the assessment year 2002-03 in ITA No.429/Coch/2006 order dated 08-02-2003. According to the ld.senior counsel for the assessment year 2002-03, this bench of the Tribunal found that the investment in Gujarat Perstop Electroniks Ltd, though not engaged in the same line of business as that of the assessee company was for the purpose of business and write off of 90% of the investment was in the nature of loss incidental to business, and therefore, allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. It is not in dispute that Gujarat Perstop Electroniks Ltd is not in the business of manufacture and sale of automotive tyres. Therefore, the investment made by the assessee to the extent of Rs. 5.18 crores for acquiring the shares of Gujarat Perstop Electroniks Ltd cannot be in the course of earning of profit or running the existing business effectively and efficiently. This investment of 5.18 crores was made by the assessee to acquire a new platform / profit earning apparatus for expanding the scope of its business. Therefore, under normal circumstances, this should have been treated as capital expenditure. Any loss incurred in the investment for a capital asset has to be treated as capital loss. Therefore, we have our own reservation about the correctness of the decision of the earlier bench of this Tribunal for the assessment year 2002-03. We are conscious that the decision of the co-ordinate bench of this Tribunal is binding on the subsequent benches. Even though we have reservation about the correctness of the decision taken by the earlier bench, to maintain the judicial discipline, this Tribunal has to follow the decision taken by the earlier bench of this Tribunal. In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the ld.senior counsel, after acquiring the South African company through its Mauritius subsidiary, the assessee was able to acquire raw materials at low cost due to centralized purchasing. The engineering and technical support supplemented by skills the transfer through on the job training, outsourcing the product to capitalize on lower manufacturing cost. The assessee increased its ability to secure off-shore funding at more competitive rates. Apart from that the assessee anticipated benefits in centralized international marketing, global brand positioning, product range rationalization, etc. The ld.senior counsel further submitted that on 29-03-2007, the Apollo Mauritius converted the above said loan advanced by the assessee into non cumulative redeemable preferential shares after getting the consent of the assessee. However, at the time of conversion of the loan into cumulative redeemable preferential shares, due to decline in the value of the Rands, the loan of 314 million Rands which was equivalent to 232.92 crores had declined by an amount of Rs. 45.54 crores. After conversion of loan into redeemable preferential shares, the value of the same stood at 187.33 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee has also placed reliance on various judgments of the various High Courts wherein similar interest was allowed on the borrowed funds. Applying the principles laid down by the Supreme Court and various High Courts on the interest paid on the loan which was advanced to sister concern, the ld.senior counsel for the assessee submitted that the loan advanced to Mauritius company for the purpose of acquiring controlling interest in DTIPL was for business purpose and was due to commercial expediency, therefore, the loss suffered by the assessee due to foreign exchange fluctuation has to be allowed as business loss. 26. Referring to the judgment of the Delhi High Court in CIT vs Woodward Governor India (P) Ltd 294 ITR 451 (Del) which has been approved by the Supreme Court in 312 ITR 254 (SC), the ld.senior counsel submitted that the increase in liability due to increase in the rate of foreign exchange was held to be on the revenue account, hence, it is allowable as revenue expenditure. Therefore, the loss suffered by the assessee has to be allowed as revenue expenditure. 27. On the contrary, Shri M Anil Kumar, the ld.DR submitted that the assessee has not claimed loss in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subsidiary company for the purpose of acquiring a controlling interest in the South African company. It is an admitted fact that the assessee acquired enduring benefit due to expansion of its business in South Africa. The assessee utilized the marketing net work of the South African company. Due to centralized purchase, the cost of raw material has considerably lowered down and the assessee was able to market its product on competitive rate. The assessee was able to reduce the manufacturing cost due to transfer of technical skill acquired from South African company. Therefore, the assessee obtained enduring benefit in the capital field. The assessee also acquired 100% controlling interest in the South African company. Therefore, it is obvious that the loan was advanced by the assessee for acquiring the South African company, which is undoubtedly a capital asset. In other words, the loan advanced by the assessee was converted into an investment. 29. Now the question arises for consideration is when the value of the shares of Mauritius subsidiary company was diminished due to reduction in Indian rupee, whether such a diminution could be allowed as revenue loss? When the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture incurred by the assessee in the process of earning of profit is a revenue expenditure. However, if any expenditure was incurred in the process of establishing a capital asset either by expanding the existing unit or by expanding the profit making apparatus it has to be treated as capital expenditure. 19. Now, in the above background, we have to see whether acquisition of tyre manufacturing company along with the distribution network at South Africa would expand the business and profit making apparatus of the assessee or not? The assessee, instead of acquiring the company directly, established a company in Mauritius as 100% subsidiary company and the said subsidiary company has established another company in South Africa. The motive and intention behind the establishment and creation of two intermediary companies is for the purpose of acquiring Dunlop Tyres International (proprietory) Ltd. The loan in foreign exchange was granted to achieve the above object of acquiring the company in South Africa. This Tribunal is of the considered opinion that by acquisition of a company in South Africa, the manufacturing base and distribution network, in other words, the capital base of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as revenue expenditure. The Apex Court in the case of S.A. Builders (supra) found that advancing the amount borrowed to the sister concern is also a business purpose and there is a commercial expediency in advancing the amount. So long as the funds advanced to the sister concern are used for business purpose of the sister concern and the amounts by the directors of the sister concern for their personal purpose, the interest on such loan has not to be allowed as business expenditure. We are unable to understand how this principle laid down by the Apex Court is applicable to the facts of the case. Here, the assessee advanced the so-called loan for the purpose of acquiring controlling interest in the South African Company through its Mauritius subsidiary company which is a capital investment. Therefore, the advance of loan is for acquiring a capital asset or for expansion of its capital base. Therefore, the loss, if any, suffered has to be treated as capital loss and it cannot be allowed as revenue loss. 32. It is well settled principles of law that if the money was advanced for the purpose of acquiring a capital interest which is enduring in nature, then the loss or profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es received from Dunlop Tyres International Pty Ltd (now known as Apollo Tyres Soputh Africa (Proprietory) Limited) (DTIPL). 37. Shri Ajay Vohra, the ld.senior counsel for the assessee submitted that the assessing officer and the Transfer Pricing Officer made an addition of Rs. 7,24,53,335 on account of interest received on the amount advanced to associate enterprise in Mauritius and on account of reimbursement of expenses received from DTIPL. According to the ld.senior counsel, the assessee advanced a loan of Rs. 314 million Rands equivalent to 232.92 crores to Apollo Mauritius Holdings Ltd. As per the agreement with Apollo Mauritius Holding Ltd the loan carried interest @7.5% per annum. Accordingly, the assessee received interest of Rs. 7,07,13,227. In the transfer pricing study, according to the ld.senior counsel, the assessee benchmarked the international transaction using LIBOR. The six months average USD LIBOR rate for the period April, 2006 to March, 2007 comes to 5.39% per annum. However, the assessee actually charged 7.5% which is higher than the comparable uncontrolled price of six month USD LIBOR. Therefore, according to the ld.senior counsel, the transaction of advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the average six months USD LIBOR rate for the period April, 2006 to March, 2007 may not be the appropriate method. In respect of reimbursement of expenses received from Dunlop Tyres International Pvt Ltd, the assessing officer found that the assessee has received the money without any interest and the interest cost has been ignored by the assessee. According to the ld.DR, the TPO, by adopting the interest rate taken earlier for advancing similar loans to associate enterprises made adjustment. According to the ld.DR, the DRP, after taking into consideration the substantial gap between the time of expenditure and the time of reimbursement confirmed the assessment made by the TPO. 42. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee advanced loan to associate enterprise in Mauritius and received interest. The assessee has also received reimbursement of expenditure from DTIPL. The question arises for consideration is - whether the assessee has charged interest at arm's length price in respect of loan advanced to associate enterprise. 43. We have carefully gone through all the decisions referred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case on hand also, the loan was advanced in foreign currency to Mauritius associate concern. The assessee availed loan in foreign currency to advance loan to the associate concern in Mauritius. The assessee, in fact, charged interest at 7.5%. The LIBOR rate of interest during that period is 5.39% per annum. Therefore, the rate of interest charged by the assessee on the loan advanced to associate enterprise on the international transaction is more than the LIBOR average rate for the six months' period during the relevant time. 45. Since the co-ordinate benches of this Tribunal at Chandigarh and Mumbai found that in respect of international transaction, LIBOR would be more appropriate, this Tribunal is of the considered opinion that the assessing officer has to adopt LIBOR than the domestic market rate. In the case before us, the domestic market rate comes nearly to 7.14% to 7.5%. Therefore, this Tribunal is of the considered opinion that the assessing officer is not justified in rejecting the LIBOR rate of interest by determining the arm's length price in respect of loan advanced to associate enterprise. Accordingly, the orders of the lower authorities are set aside and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d development u/s 35(2AB) of the Act. 50. The ld.senior counsel for the assessee submitted that the very same issue came up before this Tribunal for the assessment year 2006-07 in ITA Nos 31 & 74/Coch/2010. This Tribunal found that the assessee failed to make any claim before the assessing officer, therefore, the matter was restored to the file of the assessing officer for consideration on merit in respect of deduction u/s 35(2AB). We heard Shri M Anil Kumar, the ld.DR also. 51. As rightly submitted by the ld.senior counsel for the assessee, deduction u/s 35(2AB) of the Act the issue was remanded back to the file of the assessing officer as the assessee failed to claim the same before the assessing officer. For the sake of consistency, the orders of the lower authorities are set aside and the issue u/s 35(2AB) of the Act is remanded back to the file of the assessing officer for reconsideration. The assessing officer shall reconsider the issue and decide the same afresh in accordance with law after giving reasonable opportunity of hearing to the assessee. 52. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on this 20th Decemb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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