ITAT Rules in Favor of Assessee on Transfer Pricing, Subsidies

ITAT Rules in Favor of Assessee on Transfer Pricing, Subsidies, and Section 32AC While Upholding Revenue’s Section 43B Disallowance

Issue

Whether internal CUP based on State distribution tariffs, capital subsidies exemption, Section 32AC deduction on CWIP, and Section 14A restrictions apply in favor of the assessee, while unpaid leave encashment provisions remain disallowable under Section 43B(f).

Facts

The assessee benchmarked captive power transfers using tariffs charged by State distribution companies, which the TPO rejected in favor of generating company rates while also making ad hoc transfer pricing adjustments for AE support services.
The AO applied Rule 8D(2)(iii) disallowance under Section 14A across all investments (including non-yielding ones), imported the formula into Section 115JB book profit, and added non-monetary perquisite tax and income-tax interest provisions.
The assessee treated sales tax incentives, royalty refunds, and excise duty exemptions as non-taxable capital receipts under normal provisions and Section 115JB MAT, as they were received under State schemes encouraging capital investment.
The AO denied Section 32AC deduction for integrated plant and machinery assembled during the year from opening capital work-in-progress (CWIP) and refused balance additional depreciation for assets used under 180 days in the prior year.
Pre-operative expansion expenses were capitalized by the AO, Section 80-IA(4) deductions for captive rail systems were denied, and common Head Office costs were allocated based on turnover rather than expenditure ratios.
The assessee created a provision for leave encashment based on actuarial valuation without making actual payment during the previous year.

Decision

Transfer Pricing & CUP: Internal CUP based on distribution company rates is valid; ad hoc TPO adjustments without applying Section 92C methods are bad in law.
Section 14A & MAT Adjustments: Administrative disallowance under Rule 8D(2)(iii) applies strictly to income-yielding investments and cannot be imported into Section 115JB MAT computations.
Capital Subsidies Exemption: Incentives aimed at industrial expansion are non-taxable capital receipts exempt from both normal income tax and Section 115JB book profit calculations.
Section 32AC & Additional Depreciation: CWIP assembled and operationalized during the year qualifies as acquired and installed plant/machinery for Section 32AC, and balance additional depreciation is allowable in the succeeding year.
Infrastructure & Head Office Allocation: Captive rail systems qualify under Section 80-IA(4), and common Head Office expenses must be allocated based on expenditure ratios rather than turnover.
Section 43B(f) Leave Encashment: Unpaid leave encashment provisions are strictly disallowable under Section 43B(f), and provisions for income-tax interest must be added back to MAT book profit.

Key Takeaways

Purpose Test for Subsidies: The taxability of a subsidy depends on the scheme’s core objective to promote capital investment, irrespective of its calculation mechanism or disbursement timing.
Installation Defines Acquisition: Component items held in capital work-in-progress achieve the status of eligible plant and machinery under Section 32AC only upon final assembly and installation.
Mandatory Statutory Payment Rules: Actuarial accounting provisions for leave encashment cannot bypass the strict statutory requirement of actual payment mandated by Section 43B(f).

IN THE ITAT MUMBAI BENCH ‘K’

DCIT

ACC Ltd.

Ms. Kavitha Rajagopal, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal Nos. 1370, 1371 (Mum) of 2024 and 4014 & 4016 (Mum) of 2025
C.O. Nos. 197 & 198 (Mum) of 2025
[Assessment years 2014-15, 2015-16, 2016-17 and 2018-19]

JULY 29, 2026

Saurabh Soparkar, Ld. AR for the Appellant. Ms. Neena Jeph, Ld. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- These four appeals filed by the Revenue are directed against the orders passed under section 250 of the Income-tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals) -55, Mumbai[hereinafter referred to as “the CIT(A)”] for the assessment years 2014-15, 2015-16, 2016-17 and 2018-19. The assessee has also filed cross-objections in the Revenue’s appeals for the assessment years 2015-16 and 2018-19. Since these appeals and cross-objections pertain to the same assessee and involve certain common and overlapping issues, they are being disposed of by this common order.

2. The relevant particulars of the impugned appellate orders and the assessment orders from which they arise are set out below:

ITA No.	Assessment year	Date of order of the learned CIT(A)	Assessment order appealed against
1371/Mum/2024	2014-15	23.01.2024	Order dated 14.02.2018 passed by the DCIT (LTU)-1, Mumbai, under section 143(3) read with section 144C(3) of the Act
4014/Mum/2025	2015-16	27.03.2025	Order dated 16.01.2019 passed by the DCIT (LTU)-1, Mumbai, under section 143(3) read with section 144C(3) of the Act
1370/Mum/2024	2016-17	23.01.2024	Order dated 19.02.2020 passed by the DCIT (LTU)-1, Mumbai, under section 143(3) read with section 144C(3) of the Act
4016/Mum/2025	2018-19	28.03.2025	Order dated 13.12.2021 passed by the ACIT, NFAC, Delhi, under section 143(3) read with section 144C(3) of the Act

3. The appeals of the assessee for all the four assessment years were partly allowed by the learned CIT(A). The appellate proceedings for the assessment years 2014-15 and 2016-17 were adjudicated through a consolidated appellate order dated 23.01.2024, whereas separate appellate orders were passed for the assessment years 2015-16 and 2018-19. Aggrieved by the relief granted to the assessee, the Revenue has preferred the present appeals. The assessee, apart from supporting the relief granted by the learned CIT(A), has filed cross-objections for the assessment years 2015-16 and 2018-19.

ITA No.1371/Mum/2024, Assessment Year 2014-15

The Revenue has raised the following grounds of appeal:

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in restricting the disallowance made u/s 14A of the I.T. Act to Rs.14,32,256/- instead of Rs. 1,73,00,000/- for the expenses incurred in earning the interest received being exempt under the I.T. Act and on the issue of investment yielding exempt income.

ii.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in ignoring the Explanation inserted by Finance Act, 2022 to section 14A that provisions shall applicable retrospectively?”

iii.

Whether on the facts and in the circumstance of the case and in law the Ld.CIT(A) was right in treating sales tax incentive subsidy as capital receipts not liable to tax and deleting the addition of sales tax incentive amounting to Rs.143,03,11,576/- made by the AO?

iv.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in directing the Assessing Officer to exclude the amount of royalty refund of Rs. 26,45,44,672/-received by assessee in respect of unit located in the state of Maharashtra, from total income, treating it to be capital receipt, which was treated as revenue receipt by the A.O as the same?

Whether on the facts and in the circumstance of the case and in law the Ld.CIT(A) was right in ignoring the fact that royalty refund was granted for the purpose to operate existing business affairs and accordingly the same falls under the rubric of revenue receipts?

vi.

Whether on the facts and in the circumstance of the case and in law the Ld.CIT(A) was right in ignoring the exclusive findings given by Apex Court in case of Sahney Steel and Press Works Ltd with regard to treatment of sales tax subsidy akin to royalty refund as Revenue receipts?

vii.

Whether on the facts and in the circumstance of the case and in law the Ld.CIT(A) was right in ignoring the fact that the royalty paid was a trading expenses and any remission or cessation of such expense on account of refund ought to be treated as revenue receipts?

viii.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in directing the Assessing Officer to allow pre-operative expenditure of Rs. 26,88,34,218/- by treating the same as revenue in nature without examining nature of expenditure actually incurred and capitalized in books of accounts?

ix.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in treating the expenses related to expansion and modernisation of existing facilities as revenue expenses ignoring the inherent nature of same being capital expenses?

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in ignoring the fact that the assessee itself had claimed these expenses as capital expenses and added them to its Capital-work-in progress/fixed assets.”?

xi.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in confirming the deletion of disallowance of deduction u/s.80IA in respect of TG-3 Power Plant ignoring the facts that the said undertaking was repurchased and thus squarely covered by prohibition under clause (ii) of sub-section 3 of 80IA?

xii.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in confirming the deletion of disallowance of deduction u/s.80IA in respect of TG-3 Power Plant ignoring the facts that the said undertaking was repurchased and no deduction u/s 80IA was claimed on any earlier instance?”

xiii.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) is correct in allowing the claim of the assessee with regard to Technical Services availed from Holcim Group Support Limited of Rs. 1,23,20,127/ paid by the assessee to its AE by rejecting the ALP determined by the TPO by following the decision of ITAT in assessee’s own case of A.Y.2013-14?

xiv.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) is correct in allowing the claim of the assessee with regard to services availed by the assessee from its AE merely on the basis of Agreement and relying on some invoices even though the assessee has failed to produce any concrete evidences by following the decision of ITAT in assessee’s own case of A.Y.2013-14?

xv.

Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) was correct in holding that TNMM method adopted by the assessee has not been examined by the TPO when the TPO after carefully examining the submission of the assessee and having held that assessee had failed to prove that any services were availed by it and any benefit was derived by it on account of provisioning of the claimed services, have rejected the TNMM method adopted by the assessee by following the decision of ITAT in assessee’s own case of A.Y.2013-14?

xvi.

Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) is erred by following the decision of ITAT in assessee own case for A.Y.2013-14 in allowing the internal CUP adopted by the assessee for benchmarking of Specified Domestic Transactions of inter unit transfer of power and rejecting external CUP adopted by TPO ignoring following facts?

The assessee had adopted internal CUP as the price charged by the power distributing company to an end consumer in the respective states. The margin earned by the power distributor for functions performed, assets employed and risks assumed by it are embedded in the said price. As against the same, the assessee does not perform any function relating to distribution, nor does it assume any risk connected with distribution.

TPO called the information u/s.133(6) of the Income Tax Act, 1961 and adopted external CUP by using the rates at which state power distribution companies had purchased power from the generating companies which is appropriate as per FAR analysis

xvii.

Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) is erred by following the decision of ITAT in assessee own case for A.Y.2013-14 in allowing the assessee for selecting power consuming unit as a tested party and rejecting TPO’s act of selecting the power generating company as tested party for benchmarking of Specified Domestic Transactions of inter unit transfer of power ignoring the comparability factor and FAR analysis

xviii.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to exclude the specific expense of cost audit fees and subscription to CMA in respect of Cement manufacturing units for the purpose of computing deduction u/s.80IA/ 80IC without considering the fact that the same forms an integral part of expenses mandatorily meant for conducting any business?

xix.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the apportionment of the indirect Head Office expenses while computing deduction u/s.80IA/80IC?

xx.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting CENVAT credit adjustment while computing deduction u/s. 80-IA on captive power plants, rail system and port facility developed by the appellant without appreciating the fact that debiting expenditure in individual units without considering CENVAT credit results in distortion of profits of that particular unit?

xxi.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in allowing deduction u/s. 80-IA on rail system ignoring the fact that said ‘rail system’ served no means of public utility manifestly an infringement of conditions prescribed u/s. 80-IA?

xxii.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ignoring the fact that ‘rail system’ of assessee did not have any income and quantification of savings towards loading and unloading expenditure and road freight does not tantamount to generation of any income eligible to fall under the ambit of provisions of section 80IA?

xxiii.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ignoring the fact that even in case the said ‘rail system’ was considered as Hnfrastnccture facility’, profit derived from such needs to be reduced by apportioning part of the Head Office and common expenses?

xxiv.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the disallowance of claim of deduction u/s.32AC amounting to Rs.51,31,52,646/-in respect of capital work in progress capitalized during the year?

xxv.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition of Sales Tax incentive, excise duty exemption and royalty refund benefits availed during the year by assessee in computing book profit u/s 115JB of the Act ignoring the fact that any remission in trading liability in the form of sales tax incentive, excise duty exemption and royalty refund ought to be treated as revenue receipts?”

xxvi.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the Disallowances of expenses u/s 14A r.w.r. 8D while computing book profit u/s 115JB of the Act?’

xxvii.

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting disallowance of tax of Rs.34,12,177/- on non-monetary perquisites in computing the book profits u/s 115JB without appreciating that the amount paid represented the tax in the hands of assessee which was required to be added to book profit?

xxviii.

The appellant craves leave to add, amend and/or vary the grounds of appeal before or during the course of hearing.

ITA No.4014/Mum/2025, Assessment Year 2015-16

The Revenue has raised the following grounds of appeal, which are reproduced verbatim:

Whether on the fact and circumstances of the case and in law, the Hon’ble CIT(A) is erred by following the decision of ITAT in assessee own case for AY 2013-14 in allowing the internal CUP adopted by the assessee for benchmarking of Specified Domestic Transactions of inter unit transfer of power and rejecting external CUP adopted by TPO ignoring following facts?

(a)

(b)

TPO called the information under Section 133(6) of the Income Tax Act, 1961 and adopted external CUP by using the rates at which state power distribution companies had purchased power from the generating companies which is appropriate comparable as per FAR analysis.

ii.

Whether on the fact and circumstances of the case and in law, the Hon’ble CIT(A) is erred by following the decision of ITAT in assessee own case for AY 2013-14 in allowing the assessee for selecting power consuming unit as a tested party and rejecting TPO’s act of selecting the power generating company as tested party for benchmarking of Specified Domestic Transactions of inter unit transfer of power ignoring the comparability factor and FAR analysis?

iii.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in restricting the disallowance made u/s 14A of the I.T. Act to Rs. 33,00,000/- for the expenses incurred in earning the interest received being exempt under the I.T. Act, ignoring the fact that assessee could not establish any cogent working for expense attributable to exempt income and hence AO has rightly applied section 14A of the Act r.w. rule 8D of Rules ?

iv.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in restricting the disallowance made u/s 14A of the I.T. Act to Rs. 33,00,000/- for the expenses incurred in earning the interest received being exempt under the I.T. Act, while computing book profit of the assessee, ignoring the fact that assessee could not establish any cogent working for expense attributable to exempt income and hence AO has rightly applied section 14A of the Act r.w. rule 8D of Rules?”

Whether on the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in treating sales tax incentive subsidy as capital receipts not liable to tax ignoring the fact that sales tax is a trading liability and any remission in that aspect is revenue receipt?

vi.

Whether on the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in ignoring the fact that sales tax subsidy was granted for the purpose to operate existing business affairs and accordingly the same falls under the rubric of revenue receipts?

vii.

Whether on the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in ignoring the exclusive findings given by Apex Court in case of Sahney Steel and Press Works Ltd with regard to treatment of sales tax subsidy as Revenue receipts”?

viii.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in directing the Assessing Officer to exclude the amount of royalty refund of Rs.31,18,38,263/-received by assessee in respect of unit located in the state of Maharashtra, from total income, treating it to be capital receipt, which was treated as revenue receipt by the A.O.?

ix.

Whether on the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in ignoring the fact that royalty refund was granted for the purpose to operate existing business affairs and accordingly the same falls under the rubric of revenue receipts?

Whether on the facts and in the circumstance of the case and in law the Ld.CIT(A) erred in ignoring the exclusive findings given by Apex Court in case of Sahney Steel and Press Works Ltd with regard to treatment of sales tax subsidy akin to royalty refund as Revenue receipts?

xi.

Whether on the facts and in the circumstance of the case and in law the Ld.CIT(A) erred in ignoring the fact that the royalty paid was a trading expenses and any remission or cessation of such expense on account of refund ought to be treated as revenue receipts?

xii.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) in allowing the appeal of the assessee and holding excise duty exemption availed by the assessee as capital receipt?

xiii.

Whether on the facts and in the circumstances of the case and in law, ld. CIT(A) erred in directing the Assessing officer to allow pre-operative expenditure of Rs. 46,83,78,052/- by treating the same as revenue in nature without examining nature of expenditure actually incurred and capitalized in books of accounts?

xiv.

Whether on the facts and in the circumstances of the case and in low, ld. CIT(A) erred in treating the expenses related to expansion and modernisation of existing facilities as revenue expenses ignoring the inherent nature of same being capital expenses?

xv.

Whether on the facts and in the circumstances of the case and in law, ld. CIT(A) erred in ignoring the fact that the assessee itself had claimed these expenses as capital expenses and added them to is Capital-work-in progress/fixed assets.?

xvi.

Whether on the facts and in the circumstances of the case R in law the ld. CIT(A) erred in directing the assessing officer that auditor’s fee and director’s remuneration (indirect expenses) should not be apportioned for computing deduction u/s 80IA of the Act.

xvii.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that basis of allocation of head office expenses as turnover is not really correct and reasonable, and hence the allocation should be based on expenditure incurred by the units vis-a-vis overall expenditure on the basis of expenditure of respective units excluding directors remuneration and auditors fees?

xviii.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting CENVAT credit adjustment while computing deduction u/s. 80-IA on captive power plants, rail system and port facility developed by the appellant without appreciating the fact that debiting expenditure in individual units without considering CENVAT credit results in distortion of profits of that particular unit?

xix.

Whether, on the facts and in the circumstances of the case and in law the Ld CIT(A) erred in allowing deduction u/s. 80-IA on rail system ignoring the fact that said ‘rail system’ served no means of public utility manifestly an infringement of conditions prescribed u/s. 80-IA?

xx.

Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in ignoring the fact that „rail system’ of assessee did not have any income and quantification of savings towards loading and unloading expenditure and road freight does not tantamount to generation of any income eligible to fall under the ambit of provisions of section 80IA?

xxi.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that even in case the said ‘rail system’ was considered as ‘infrastructure facility’, profit derived from such needs to be reduced by apportioning part of the Head Office and common expenses”?

xxii.

Whether, on the facts and in the circumstances of the case and in law, the Ld CIT(A) was right in deleting the disallowance of claim of deduction u/s 32AC amounting to Rs.49,46,02,939/-in respect of capital work in progress capitalized during the year?

xxiii.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Sales Tax subsidy, excise duty exemption and royalty refund benefits availed during the year by assessing computing book profit u/s 115JB of the Act ignoring the fact that any remission in trading liability in the form of sales tax subsidy, excise duty exemption and royalty refund ought to be treated as revenue receipts?

xxiv.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the Disallowances of expenses u/s 14A; r.w.r. 8D while computing book profit u/s 115JB of the Act?

xxv.

The appellant craves leave to add, amend and/or vary the Grounds of Appeal before or during the course of hearing.

The assessee has filed a cross-objection (CO No. 198/Mum/2025) in the aforesaid Revenue appeal (ITA No. 4014/Mum/2025) and has raised the following grounds:

In law and in the facts and circumstances in the case of the Appellant, the Assessment Order passed under section 143(3) r.w.s 144C(3) of the Act dated 16.01.2019 is time barred in view of provision of Section 153 of the Act and bad in law in view of the Decision of Hon’ble Madras High Court in the case of Roca Bathroom Products (P.) Ltd. .

In law and facts and circumstances of the case, the Ld CIT(A) has erred in upholding the disallowance of Rs. Rs.33,00,000/- as expenses incurred towards earning exempt dividend income u/s 14A r.w.r 8D by considering investments which have yielded dividend income, without appreciating the fact that appellant has already made suo-moto disallowance of Rs.44,04,678/- in the return of income, thus no disallowance is required to be made.

In law and facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the disallowance of provision of leave encashment amounting to Rs. 5,67,83,788/- without appreciating the fact that same is based on actuarial valuation report.

In law and facts and circumstances of the case, the Ld CIT(A) has erred in upholding the apportionment made by AO of indirect Head Office expenses aggregating to Rs. 220,24,55,943/- and adjustment of such allocated amount of Rs 62,79,96,792/- in computing Tax Holiday u/s 80IA for eligible Captive Power Plants and for rail system, without establishing any nexus between the nature of expenses and such eligible units of the Appellant.

In law and facts and circumstances of the case, the Ld. CIT(A) has erred in denying the Appellant’s claim of exclusion of profit on sale of investments and loss on sale of fixed assets amounting to Rs. 25,45,47,728 and Rs. 14,03,93,156/- respectively, being capital in nature, in computing book profit u/s 115JB.

In law and facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the addition of provision for interest on income tax made by AO in computing book profit u/s.115JB amounting to Rs. 19,34,38,553/-.

In law and in the facts and circumstances of the appellant’s case, appellant craves leave to add, amend and/or alter the ground or grounds of appeal either before or at the time of hearing of the appeal.

ITA No.1370/Mum/2024, Assessment Year 2016-17

The Revenue has raised the following grounds of appeal:

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) was right in restricting the disallowance made u/s 14A of the I.T. Act to Rs.50,32,256/- for the expenses incurred in earning the interest received being exempt under the I.T. Act?

ii.

iii.

iv.

vi.

Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) is correct in allowing the claim of the assessee with regard to Technical Services availed from Holcim Group Support Limited of Rs. 1,23,20,127/- paid by the assessee to its AE by rejecting the ALP determined by the TPO by following the decision of ITAT in assessee’s own case of A.Y.2013-14?.

vii.

Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) is correct in allowing the claim of the assessee with regard to services availed by the assessee from its AE merely on the basis of Agreement and relying on some invoices even though the assessee has failed to produce any concrete evidences by following the decision of ITAT in assessee’s own case of A.Y.2013-14?.

viii.

Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) was correct in holding that TNMM method adopted by the assessee has not been examined by the TPO when the TPO after carefully examining the submission of the assessee and having held that assessee had failed to prove that any services were availed by it and any benefit was derived by it on account of provisioning of the claimed services, have rejected the TNMM method adopted by the assesssee by following the decision of ITAT in assessee’s own case of A.Y.2013-14 ?

ix.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) is erred by following the decision of ITAT in assessee own case for A.Y.2013-14 in allowing the assessee for selecting power consuming unit as a tested party and rejecting TPO’s act of selecting the power generating company as tested party for benchmarking of Specified Domestic Transactions of inter unit transfer of power ignoring the comparability factor and FAR analysis.

xi.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in allowing deduction u/s. 80-IA on rail system ignoring the fact that said ‘rail system’ served no means of public utility manifestly an infringement of conditions prescribed u/s. 80-IA?

xii.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that ‘rail system’ of assessee did not have any income and quantification of savings towards loading and unloading expenditure and road freight does not tantamount to generation of any income eligible to fall under the ambit of provisions of section 80IA?

xiii.

Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that even in case the said “rail system? was considered as “infrastructure facility’, profit derived from such needs to be reduced by apportioning part of the Head Office and common expenses”?

xiv.

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the Assessing Officer to exclude the specific expense of cost audit fees and subscription to CMA in respect of Cement manufacturing units for the purpose of computing deduction u/s.80IA/ 80IC without considering the fact that the same forms an integral part of expenses mandatorily meant for conducting any business?

xv.

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in confirming the apportionment of the indirect Head Office expenses while computing deduction u/s.80IA/80IC?

xvi.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in deleting CENVAT credit adjustment while computing deduction u/s. 80-IA on captive power plants, rail system and port facility developed by the appellant without appreciating the fact that debiting expenditure in individual units without considering CENVAT credit results in distortion of profits of that particular unit?”

xvii.

Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in allowing the claim of balance 10% additional depreciation amounting to Rs.22,75,66,963/-in A.Y.2016-17 in respect of assets acquired but put to use for less than 180 days in A.Y.2015-16, whereas the third proviso to section 32(1) inserted by Finance Act, 2015 was applicable is w.e.f 01.04.2016?

xviii.

xix.

The appellant craves leave to add, amend and/or vary the grounds of appeal before or during the course of hearing.

ITA No.4016/Mum/2025, Assessment Year 2018-19

The Revenue has raised the following grounds of appeal:

ii.

iii.

Whether on facts and in circumstances of the case and in law, the Ld. CIT(A) erred in allowing the claim of bad debts under section 36(1) (vii) of the Income-tax Act, 1961, when the assessee failed to establish that bad debts written off were proper and legitimate debts”

iv.

The appellant craves leave to add, amend and/or vary the Grounds of Appeal before or during the course of hearing.

The assessee has filed a cross-objection(CO No. 197/Mum/2025) in the aforesaid Revenue appeal(ITA No. 4016/Mum/2025) and has raised the following grounds:

In law and in the facts and circumstances in the case of the Appellant, the Assessment Order passed under section 143(3) r.w.s 144C(3) of the Act dated 13.12.2021 is time barred in view of provision of Section 153 of the Act and bad in law in view of the Decision of Hon’ble Madras High Court in the case of Roca Bathroom Products (P.) Ltd.

In law and in the facts and circumstances in the case of the Appellant, the Assessment Order passed under section 143(3) r.w.s 144C(3) of the Act dated 13.12.2021 is time barred in view of provision of Section 144C(4) as the assessment order was not passed within one month from the end of the month in which acceptance is received.

4. We find that several grounds raised by the Revenue in these appeals involve common and recurring issues. Therefore, for the sake of convenience and to avoid repetition, we shall first adjudicate the common issues by taking the lead assessment year in which the relevant issue arises and apply our findings, wherever the facts and grounds are identical, to the corresponding grounds for the other assessment years. The issues which are confined to a particular assessment year shall be adjudicated separately.

5. For convenient adjudication, the common grounds of the Revenue are tabulated below:

Sr. No.	Common issue	A.Y. 2014-15	A.Y. 2015-16	A.Y. 2016-17	A.Y. 2018-19
1	Transfer pricing adjustment relating to inter-unit transfer of power, adoption of internal CUP and selection of tested party	Grounds xvi and xvii	Grounds i and ii	Grounds ix and x	Grounds i and ii
2	Disallowance under section 14A read with Rule 8D while computing income under normal provisions	Grounds i and ii	Ground iii	Grounds i and ii	Not involved
3	Adjustment under section 14A read with Rule 8D while computing book profit under section 115JB	Ground xxvi	Grounds iv and xxiv	Ground xviii	Not involved
4	Allowability of preoperative expenditure as revenue expenditure	Grounds viii to x	Grounds xiii to xv	Grounds iii to v	Not involved
5	Transfer pricing adjustment in respect of technical services availed from Holcim Group Support Limited	Grounds xiii to xv	Not involved	Grounds vi to viii	Not involved
6	Deduction under section 80-IA in respect of rail system	Grounds xxi to xxiii	Grounds xix to xxi	Grounds xi to xiii	Not involved
7	Allocation or apportionment of indirect Head Office expenses while computing deduction under sections 80-IA and 80-IC	Grounds xviii and xix	Grounds xvi and xvii	Grounds xiv and xv	Not involved
8	CENVAT credit adjustment while computing deduction under section 80-IA	Ground xx	Ground xviii	Ground xvi	Not involved
9	Treatment of sales tax incentive or subsidy as a capital receipt under the normal provisions	Ground iii	Grounds v to vii	Not involved	Not involved
10	Treatment of royalty refund as a capital receipt under the normal provisions	Grounds iv to vii	Grounds viii to xi	Not involved	Not involved
11	Deduction under section 32AC in respect of capital work-in-progress capitalised during the year	Ground xxiv	Ground xxii	Not involved	Not involved
12	Exclusion of sales tax incentive, excise duty exemption and royalty refund while computing book profit under section 115JB	Ground xxv	Ground xxiii	Not involved	Not involved

6. The following issues are confined to a single assessment year and will require separate consideration:

Assessment year	Ground	Issue
2014-15	Grounds xi and xii	Deduction under section 80-IA in respect of TG-3 Power Plant
2014-15	Ground xxvii	Tax paid on non-monetary perquisites while computing book profit under section 115JB
2015-16	Ground xii	Treatment of excise duty exemption as a capital receipt under the normal provisions
2016-17	Ground xvii	Balance 10% additional depreciation on assets put to use for less than 180 days in the preceding year
2018-19	Ground iii	Allowability of bad debts under section 36(1)(vii)

7. At the outset, the learned Authorised Representative (AR) submitted that the grounds raised by the assessee in CrossObjection No.197/Mum/2025 pertain to the jurisdictional validity of the assessment and that the assessee does not wish to press the same. Accordingly, the grounds raised in the cross-objection are dismissed as not pressed. Consequently, Cross-Objection No.197/Mum/2025 stands dismissed.

8. We shall now proceed to adjudicate the common issues arising in these appeals. For the sake of convenience and to avoid repetition, each common issue shall be considered by taking the relevant assessment year as the lead year. Our findings thereon shall apply, mutatis mutandis, to the corresponding grounds raised in the other assessment years, wherever the material facts and circumstances are identical.

Sr.1 – Transfer pricing adjustment in respect of inter-unit transfer of power, adoption of internal CUP and selection of tested party.

9. The first common issue arising in these appeals relates to the determination of the arm’s length price of electricity generated by the assessee’s captive power plants and transferred to its cement manufacturing units. On examination of the respective assessment orders and the transfer pricing adjustments incorporated therein, the common grounds and the amounts involved may be tabulated as under:

Assessment year	Revenue’s grounds	Transfer pricing adjustment relating to inter-unit transfer of power
2014-15	Ground Nos. xvi and xvii	Rs.442,01,57,885/-
2015-16	Ground Nos. i and ii	Rs.304,70,90,020/-
2016-17	Ground Nos. ix and x	Rs.313,65,42,126/-
2018-19	Ground Nos. i and ii	Rs.189,10,08,541/-

10. The principal controversy is whether the arm’s length price of such inter-unit transfer of power should be determined by applying the internal CUP adopted by the assessee or the external CUP adopted by the TPO, and whether the power-generating unit or the power-consuming unit should be regarded as the tested party.

11. For convenience, the facts for A.Y. 2014-15 are taken as the leading year.

12. The assessee had 16 captive power-generating units eligible for deduction under section 80-IA of the Act. Electricity generated by these units was captively transferred to the assessee’s cementmanufacturing units. Since the transaction constituted a specified domestic transaction, the assessee benchmarked the same under the Comparable Uncontrolled Price method. The power-consuming units were considered as the tested parties. The assessee adopted the rate at which the respective State electricity distribution companies supplied electricity to those consuming units as an internal CUP. On this basis, the assessee adopted an average rate of Rs.6.71 per unit and determined the aggregate value of the electricity transferred at Rs.906,88,83,255/-.

13. The TPO rejected the benchmarking carried out by the assessee. According to the TPO, a State electricity distribution company performs substantial distribution functions, employs specialised assets and assumes risks connected with transmission and distribution of electricity. The captive powergenerating units of the assessee neither performed such distribution functions nor employed the corresponding assets or assumed the associated risks. Therefore, the retail tariff charged by a distribution company to an end-consumer was held not to be comparable with the price receivable by a power generator.

14. The TPO further held that the captive power-generating unit, being the unit whose profits were eligible for deduction under section 80-IA, ought to be considered as the tested party. He accordingly rejected the assessee’s selection of the powerconsuming unit as the tested party and its reliance upon the internal CUP.

15. For determining the arm’s length price, the TPO obtained information under section 133(6) from the respective State powergenerating companies. He adopted the rates at which the State power-generating companies supplied electricity to the State distribution companies as external CUPs. Applying those rates, the TPO determined the arm’s length value of the electricity transferred at Rs. 464,87,25,371/-, as against Rs.906,88,83,255/- determined by the assessee. Consequently, a transfer-pricing adjustment of Rs. 442,01,57,885/- was proposed. The AO, while passing the assessment order, incorporated the aforesaid adjustment and recomputed the profits eligible for deduction under section 80-IA.

16. Before the CIT(A), the assessee submitted that the comparability factors prescribed in Rules 10B(2) and 10B(3) did not support the adoption of the price at which a State powergenerating company supplied electricity to a distribution company. The characteristics of the electricity supplied by a distribution company and that supplied by the assessee’s captive power plant to its cement-manufacturing unit were the same. In both cases, electricity was delivered to the premises of the ultimate consumer.

17. The assessee contended that its captive power plants performed not only the function of generation but also the function of delivering electricity to the cement-manufacturing units. The captive power plants involved substantial investment and were exposed to single-customer risk, capacity-utilisation risk and risks arising from the operating level of the cement units. They also ensured continuous and reliable supply of electricity, for which the cement units were willing to pay an appropriate price.

18. It was further submitted that the cement-manufacturing units purchased electricity both from the captive power plants and from the State distribution companies. The transactions were, therefore, undertaken in the same market and at the same level of trade. Accordingly, the price actually charged by the State distribution company to the cement unit constituted a reliable internal CUP.

19. The assessee also submitted that the TPO had incorrectly treated the power-generating unit as the tested party. Since reliable internal comparable transactions were available at the level of the cement-manufacturing units, the consuming units were rightly selected as the tested parties. Selection of the powergenerating unit as the tested party ignored the functional profile of the captive power plants, their risks, geographical factors and the regulatory framework applicable to generation and distribution of electricity.

20. It was further contended that the State power-generating companies and State distribution companies were regulated entities and the rates between them were determined or influenced by the respective State Electricity Regulatory Commissions. Such rates could not be regarded as uncontrolled market prices for benchmarking the assessee’s captive transfer of electricity.

21. The assessee also objected to the information collected by the TPO under section 133(6), contending that the complete details and underlying documents were not made available to it and that no proper opportunity was afforded to examine the basis, relevance and comparability of those rates.

22. Relying upon section 80-IA(8), the assessee contended that where the transfer between an eligible business and a non-eligible business was recorded at a price available in the open market, the profits of the eligible business could not be substituted by adopting a regulated generation rate. The market value was the rate at which the State distribution company supplied electricity to the end-consumer and not the rate at which it purchased electricity from a generating company.

23. The CIT(A) observed that the controversy regarding the appropriate rate for valuing electricity transferred by a captive power plant to another unit of the same assessee had been considered in several judicial decisions. Though the Calcutta High Court in ITC Ltd. had accepted the generation tariff determined by the Regulatory Commission, subsequent decisions had taken into account the materially altered legal position under the Electricity Act, 2003.

24. The CIT(A) observed that under the Electricity Act, 2003, captive power-generating units were permitted, through open access, to sell electricity to third-party consumers at mutually agreed prices. Therefore, it could not be presumed that a captive power plant was legally obliged to sell electricity only to a distribution company and only at a regulated generation tariff.

25. The CIT(A) further noted that an identical issue in the assessee’s own case for A.Y. 2013-14 had been decided by the Mumbai Tribunal in favour of the assessee, following its earlier order for A.Y. 2011-12. The Tribunal had accepted the rate at which the consuming unit purchased electricity from the State distribution company as an appropriate benchmark for determining the market value of electricity transferred by the captive power plant.

26. Following the decisions in Godawari Power & Ispat Ltd., Gujarat Alkalies & Chemicals Ltd., Reliance Industries Ltd., Tata Steel Ltd. and Star Paper Mills Ltd., as well as the Tribunal’s order in the assessee’s own case for A.Y. 2013-14, the CIT(A) held that the rate at which the cement-manufacturing unit purchased electricity from the State distribution company constituted the appropriate benchmark.

27. The CIT(A), therefore, concluded that the TPO was not justified in adopting the rate at which State power-generating companies supplied electricity to distribution companies. Consequently, the adjustment of Rs.442,01,57,885/-incorporated by the AO in the assessment order was deleted and the corresponding grounds of the assessee were allowed.

28. The learned AR submitted that the CIT(A) had deleted the adjustment by following the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ACC Ltd. v. DCIT/ACIT [IT Appeal Nos. 800 and 1171 (Mum) of 2022, dated 30-6-2023].The learned AR referred to paragraphs 78 to 82 of the said order and submitted that the Revenue had raised an identical ground in A.Y. 2013-14 challenging the acceptance of the internal CUP adopted by the assessee for benchmarking the specified domestic transaction of inter-unit transfer of power and the rejection of the external CUP adopted by the TPO.It was submitted that the facts, benchmarking method, comparables adopted by the respective parties and the objections raised by the Revenue in the present years were identical. Therefore, no interference with the orders of the CIT(A) was warranted and the corresponding grounds raised by the Revenue for all the years under consideration deserved to be dismissed.

29. The learned DR, on the other hand, relied upon the orders of the AO and the TPO.

30. We have considered the rival submissions and perused the material placed on record. We find that the CIT(A), while deleting the adjustments, followed the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023. In that year, the Revenue had raised an identical ground against the acceptance of the internal CUP adopted by the assessee. We noted the relevant paras of the said decision relied upon. In paragraph 80, the Coordinate Bench recorded the learned AR’s submission that the identical issue had already been decided in favour of the assessee by the Co-ordinate Bench in the assessee’s own case for A.Y. 2011-12 in ACC Ltd. v. ACIT/DCIT [IT Appeal Nos. 3139 and 3178 (Mum) of 2019, dated 28-2-2023].

31. In paragraph 81, the Co-ordinate Bench considered the rival submissions and observed that the identical issue had been decided in favour of the assessee in A.Y. 2011-12. The Coordinate Bench, therefore, reproduced the relevant findings recorded in the order for that year. It was noted therein that the assessee had captive power-generating units whose electricity was captively consumed by its cement-manufacturing units. For determining the market value of such electricity and computing the deduction under section 80-IA, the assessee adopted the rate at which the respective cement-manufacturing units would have purchased electricity from the State Electricity Boards. The AO, however, rejected the said basis and adopted the average rate prevailing in electricity-trading transactions. Consequently, the deduction claimed by the assessee under section 80-IA was reduced.

32. The Co-ordinate Bench further noted that, during the appellate proceedings for A.Y. 2011-12, the assessee had furnished a revised working of the turnover of the eligible captive power plants by adopting the Average Annual Landed Cost at which the cement-manufacturing units purchased electricity from the respective State Electricity Boards. The learned DR had opposed the said working by relying upon section 80A(6) and had contended that, since the captive power plants supplied electricity to the cement-manufacturing units, the market value was required to be determined from the point of view of the power-generating units and not from the point of view of the consuming units. It was also contended that the decisions relied upon by the assessee did not take into consideration the amendment made to section 80A(6).

33. The Co-ordinate Bench rejected the aforesaid contention of the Revenue. It observed that the decision in the case of Addl. CIT v. Reliance Industries Ltd. [IT Appeal No. 4361 (Mum) of 2012, dated 12-4-2017] covered A.Y. 2009-10 and other preceding assessment years and, therefore, it could not be accepted that the relevant amendments, including the provisions of section 80A(6), had not been considered. The decision of the Co-ordinate Bench in Reliance Industries Ltd. (supra) had subsequently been approved by the Hon’ble jurisdictional High Court in CIT-LTU v. Reliance Industries Ltd. [2020] 421 ITR 686 (Bombay). The Tribunal observed that the jurisdictional High Court had accepted the rate at which the manufacturing unit purchased electricity from the State Electricity Board as the appropriate market value of the electricity generated by the eligible captive power plant.

34. The Co-ordinate Bench also referred to the subsequent decision in Reliance Industries Ltd. v. Assistant Commissioner of Income-tax [2023] 198 ITD 158 (Mumbai – Trib.), wherein it was held that the meaning of “market value” would not undergo a change merely because the transaction was covered by the domestic transfer-pricing provisions. It was reiterated that the market value of electricity was required to be determined at the rate at which the manufacturing unit purchased electricity from the electricity distribution company in the respective State.

35. The Co-ordinate Bench further took note of the decision rendered in the case of the assessee’s group concern, Ambuja Cements Ltd. v. DCIT-LTU-2 / CIT [IT Appeal Nos. 3843 (Mum) of 2019 and 1889 (Mum) of 2018] for A.Ys. 2011-12 and 2012-13. In the said decision, after considering West Coast Paper Mills Ltd. v. Joint CIT [2006] 100 TTJ 833 (Mum.) and the judgment of the Hon’ble Bombay High Court in Reliance Industries Ltd., the Co-ordinate Bench held that the controversy as to whether the consumer tariff or the price prevailing between power companies should be adopted as the market value of electricity was no longer res integra. It was held that the price charged to the consumer, and not the price prevailing in transactions between power-generating and power-trading companies, was required to be taken into account.

36. The Co-ordinate Bench also referred to the decision of the Kolkata Bench in Deputy Commissioner of Income-tax v. Dhunseri Ventures Ltd. (Kolkata – Trib.), which directly concerned the application of the CUP method to specified domestic transactions involving captive consumption of electricity. In that case, the non-eligible manufacturing units purchased electricity both from the captive power plants and from the State Electricity Board. The Average Annual Landed Cost paid by those units to the State Electricity Board was held to constitute a reliable internal CUP because the product was identical, the electricity was supplied during the same period, the geographical market was the same and there was no material difference in the timing of the controlled and uncontrolled transactions. Accordingly, the rate at which the non-eligible units procured electricity from the State Electricity Board was held to be the most appropriate arm’s length price for benchmarking the captive transfer of electricity.

37. The Co-ordinate Bench also referred to the decision of the Delhi Bench in Nectar Lifesciences Ltd. v. ACIT [2022] (Delhi – Trib.), wherein it was held that where the consideration paid by an industrial undertaking for purchasing electricity from the State Power Corporation represented the prevailing market rate at which an industrial consumer could procure electricity, such rate should be adopted as the CUP for benchmarking the captive sale of electricity.

38. On the basis of the aforesaid judicial precedents, the Coordinate Bench in A.Y. 2011-12 held that the market value of the electricity generated by the captive power plants was required to be determined at the rates at which the cement-manufacturing units situated at different locations purchased electricity from the respective State Electricity Boards. Since the detailed location wise working furnished by the assessee required verification, the AO was directed to verify the same for the limited purpose of computation. The Co-ordinate Bench also recorded that the assessee had conceded the exclusion of units lost in transmission while computing the turnover of the captive power plants.

39. Thereafter, in paragraph 82 of the order for A.Y. 2013-14, the Co-ordinate Bench found that there was no distinguishing feature in the facts or in the legal position for that year. Respectfully following the decision for A.Y. 2011-12 and applying the principle of consistency, the Tribunal dismissed the ground raised by the Revenue challenging the acceptance of the internal CUP adopted by the assessee.

40. In the years under consideration also, the cement manufacturing units purchased electricity from the respective State distribution companies and also received electricity generated by the assessee’s captive power plants. Thus, the price paid by the same consuming units to the State distribution companies represents a direct internal comparable. The commodity supplied, the consuming unit, the geographical market and the period of supply are substantially the same. The internal CUP adopted by the assessee is, therefore, more reliable than the rate prevailing between State power-generating and distribution companies, which operates at a different level of the electricity supply chain and is generally influenced by the applicable regulatory framework.

41. We further find that the Revenue has not brought before us any material difference in the facts of the present years or any subsequent decision taking a view contrary to the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. The CIT(A) has merely followed the binding decision rendered on the identical issue in the assessee’s own case. In the absence of any distinguishing feature, judicial discipline and the principle of consistency require us to follow the earlier decision.

42. Accordingly, respectfully following the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14, we find no infirmity in the orders of the CIT(A) deleting the adjustments made in respect of the inter-unit transfer of power. Consequently, Ground Nos. xvi and xvii for A.Y. 2014-15, Ground Nos. i and ii for A.Y. 2015-16, Ground Nos. ix and x for A.Y. 2016-17 and Ground Nos. i and ii for A.Y. 2018-19 raised by the Revenue are dismissed.

Sr. 2 and 3 – Disallowance under section 14A read with Rule 8D while computing income under normal provisions and Adjustment under section 14A read with Rule 8D while computing book profit under section 115JB

43. The next common issue arising in these appeals relates to the disallowance of expenditure under section 14A read with Rule 8D while computing income under the normal provisions of the Act and the adjustment of such disallowance while computing book profit under section 115JB. Under the normal provisions, the controversy is whether the CIT(A) was justified in deleting the disallowance of interest expenditure under Rule 8D(2)(ii) on the ground that the assessee possessed sufficient interest-free funds and in restricting the disallowance under Rule 8D(2)(iii) by considering only those investments which had actually yielded exempt income during the relevant year. The Revenue has also raised the applicability of the Explanation inserted in section 14A by the Finance Act, 2022.

44. The second limb of the controversy is whether the amount computed under section 14A read with Rule 8D can be directly added while computing book profit under section 115JB. The CIT(A) deleted the adjustments by following the decisions in the assessee’s own case and the principle that the computation prescribed under Rule 8D cannot be imported into clause (f) of Explanation 1 to section 115JB.

45. We will take both aspects together as one composite issue. The year-wise particulars are as under:

Particulars	A.Y. 2014-15	A.Y. 2015-16	A.Y. 2016-17
Revenue’s grounds	Ground Nos. i and ii under normal provisions; Ground No. xxvi under section 115JB	Ground No. iii under normal provisions; Ground Nos. iv and xxiv under section 115JB	Ground Nos. i and ii under normal provisions; Ground No. xviii under section 115JB
Exempt dividend income	Rs.5,52,03,281/-	Rs.9,85,67,950/-	Rs.9,68,02,600/-
Suo motu disallowance	Rs.36,19,256/-	Rs.44,04,678/-	Nil, as reflected in the AO’s Rule 8D computation
Disallowance / addition made by AO under normal provisions	Additional disallowance of Rs.1,73,00,000/-. Total disallowance under Rule 8D was Rs.2,09,19,256/-	Additional disallowance of Rs.2,05,01,071/-. Total disallowance under Rule 8D was Rs.2,49,05,749/-	Rs.2,39,77,030/-
Relief granted by CIT(A)	Total disallowance restricted to Rs.50,32,256/-. After reducing the suo motu disallowance, net addition sustained at Rs.14,32,256/-	Total disallowance restricted to Rs.77,04,678/-. After reducing the suo motu disallowance, net addition sustained at Rs.33,00,000/-	The CIT(A) followed his findings for A.Y. 2014-15 and partly allowed the ground. Revenue’s Ground No. i states that the disallowance was restricted to Rs.50,32,256/-
Adjustment made by AO under section 115JB	Rs.2,09,19,256/-	Rs.2,05,01,071/-	Rs.2,39,77,030/-
CIT(A)’s decision under section 115JB	Entire adjustment directed to be deleted	Entire adjustment directed to be deleted	Entire adjustment directed to be deleted

46. It may be noted that, for A.Y. 2015-16, Ground No. iv challenges the restriction of the disallowance to Rs.33,00,000/-while computing book profit, whereas Ground No. xxiv separately challenges the deletion of the disallowance under section 14A while computing book profit. Both grounds, therefore, overlap and can be adjudicated together.

47. For adjudication of both limbs of the issue, A.Y. 2014-15 is taken as the lead year, since the facts for that year comprehensively cover the disallowance under section 14A read with Rule 8D under the normal provisions as well as the corresponding adjustment in the computation of book profit under section 115JB.

48. During the relevant previous year, the assessee earned dividend income aggregating to Rs.5,52,03,281/-, comprising dividend of Rs.4,12,08,101/- received from Alcon Cement Company Private Limited and Rs.1,39,95,180/- received from Aakaash Manufacturing Company Private Limited. The dividend income was claimed as exempt under sections 10(34) and 10(35) of the Act. In the return of income, the assessee had suo motu disallowed Rs.36,19,256/- under section 14A. The amount represented the proportionate salary cost of employees and overhead expenditure attributable to the activities of the Treasury and Investment Group. The allocation was also reported in the tax audit report.

49. During the assessment proceedings, the AO called upon the assessee to furnish details of the dividend income earned and the expenditure incurred in relation thereto and to explain why Rule 8D should not be applied. In response, the assessee furnished its explanation. The assessee submitted that it had not incurred any expenditure having a direct and immediate nexus with the earning of dividend income. It further submitted that sufficient own funds and internal accruals were available and the investments had been made out of such interest-free funds. According to the assessee, the borrowed funds had been utilised for the expansion of its projects and for working-capital requirements. Therefore, no part of the interest expenditure was attributable to the investments yielding exempt income. Without prejudice to the above contention, the assessee pointed out that it had already made a suo motu disallowance of Rs.36,19,256/-towards the proportionate salary and overhead expenditure attributable to its investment activities. The assessee accordingly contended that no further disallowance was warranted.

50. The AO did not accept the explanation of the assessee. He observed that investments yielding exempt income could not be managed without incurring expenditure relating to market analysis, professional expertise, evaluation of investment proposals, deployment and redemption of investments and periodic monitoring. According to the AO, the assessee would necessarily have incurred expenditure on personnel, conveyance, travelling, telephone, stationery and other administrative activities. Though such expenditure could not be precisely quantified, it had to be determined on a reasonable basis.

51. The AO further observed that investment decisions were complex in nature and required market research, day-to-day analysis of market trends and decisions regarding the acquisition, retention and disposal of investments. He also observed that substantial funds stood blocked in investments and that capital had an associated cost. Investment decisions were generally taken at meetings of the Board of Directors, which also involved administrative expenditure. In support of this reasoning, the AO relied upon the decision of the Mumbai Bench in Assistant Commissioner of Income-tax, Range 10(1), Mumbai v. Citicorp Finance (India) Ltd. [2007] 108 ITD 457/12 SOT 248/111 TTJ 82 (Mumbai).

52. The AO treated the suo motu disallowance of Rs.36,19,256/- as direct expenditure under Rule 8D(2)(i). He did not accept the assessee’s contention that the said disallowance represented the entire expenditure attributable to the earning of exempt income. He was of the view that the amount did not take into account the disallowance required under Rule 8D(2)(ii) and Rule 8D(2)(iii).The AO referred to sections 14A(2) and 14A(3), the Memorandum explaining the insertion of section 14A and the decision in Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income-tax, Range 10(2), Mumbai [2010] 234 CTR 1/328 ITR 81 (Bombay)/.(IT Appeal No. 626 of 2010 and Writ Petition No.758 of 2010 decision dated 12/08/2010) He recorded that he was not satisfied with the correctness of the expenditure claimed by the assessee to have been incurred in relation to the exempt income. He consequently invoked Rule 8D.

53. On a without-prejudice basis, the assessee furnished a working under Rule 8D by letter dated 11.12.2017. On the basis of that working, the AO determined the total disallowance at Rs.2,09,19,256/-, comprising the following:

Component	Amount
Direct expenditure under Rule 8D(2)(i)	Rs.36,19,256/-
Interest expenditure under Rule 8D(2)(ii)	Rs.80,00,000/-
Administrative expenditure under Rule 8D(2)(iii)	Rs.93,00,000/-
Total disallowance under Rule 8D	Rs.2,09,19,256/-
Less: suo motu disallowance made in the return	Rs.36,19,256/-
Additional disallowance made by the AO	Rs.1,73,00,000/-

54. Accordingly, while computing income under the normal provisions, the AO made a further disallowance of Rs.1,73,00,000/- over and above the suo motu disallowance of Rs.36,19,256/- made by the assessee.

55. The AO also considered the applicability of clause (f) of Explanation 1 to section 115JB. He observed that expenditure relatable to income exempt under section 10 was required to be added while computing book profit. Accordingly, the disallowance computed under section 14A read with Rule 8D was also included in the computation of book profit under section 115JB. As recorded by the CIT(A), the amount so added by the AO in the computation of book profit was Rs.2,09,19,256/-.

56. Before the CIT(A), the assessee challenged the AO’s failure to accept the suo motu disallowance of Rs.36,19,256/-. It reiterated that no expenditure other than the amount voluntarily disallowed had been incurred in relation to the exempt dividend income. The assessee further contended that the AO had not recorded an objective satisfaction, having regard to its accounts, as to why the computation furnished by it was incorrect.

57. The assessee submitted that it possessed sufficient interest-free funds and that no part of the borrowed funds had been utilised for making the investments. It furnished a year-wise working of its owned and borrowed funds. As on 31.03.2013, its owned funds comprised share capital of Rs.187.95 crores and reserves and surplus of Rs.7,603.77 crores. As on 31.03.2014, its share capital was Rs.187.95 crores and its reserves and surplus amounted to Rs.7,998.73 crores. It was thus submitted that the owned funds substantially exceeded the investments and, therefore, no disallowance of interest expenditure could be made under Rule 8D(2)(ii).

58. The assessee relied, inter alia, upon South Indian Bank Ltd. v. CIT, CIT v. Reliance Utilities & Power Ltd., Reliance Industries Ltd., GMM Pfaudler Ltd. and Sintex Industries Ltd. for the proposition that where interest-free own funds exceeded the investments, a presumption arose that the investments had been made out of such own funds.

59. In respect of the administrative expenditure under Rule 8D(2)(iii), the assessee submitted that only those investments which had actually yielded exempt income during the relevant year could be considered. The assessee had received dividend only from Alcon Cement Company Private Limited and Aakaash Manufacturing Company Private Limited. The investments in these two companies amounted to Rs.22.25 crores and Rs.6.01 crores, respectively, aggregating to Rs.28.26 crores. It was, therefore, submitted that the average value of investments for the purpose of Rule 8D(2)(iii) should be restricted to Rs.28.26 crores and that the AO was not justified in considering the entire investment portfolio. The assessee also contended that the investments were strategic investments. The investee companies were engaged in manufacturing goods and providing services to the assessee and contributed materially to its taxable operating income. According to the assessee, such investments had been made to advance its business objectives and not merely to earn dividend income.

60. Regarding the computation of book profit, the assessee contended that the disallowance computed under section 14A read with Rule 8D could not automatically be imported into the computation under section 115JB. It relied upon CIT v. Bengal Finance & Investments Pvt. Ltd., ACIT v. Vireet Investment Pvt. Ltd. and Essar Teleholdings Ltd. v. DCIT. The assessee also relied upon the orders passed in its own case for the preceding assessment years.

61. The CIT(A) found that the assessee had itself disallowed Rs.36,19,256/- by taking into account employee costs and overhead expenditure attributable to its investment activities. He, therefore, rejected the assessee’s contention that no expenditure whatsoever had been incurred in earning the exempt dividend income. The suo motu disallowance of Rs.36,19,256/- was accordingly retained as direct expenditure attributable to the exempt income.

62. As regards the disallowance of interest expenditure under Rule 8D(2)(ii), the CIT(A) examined the financial position of the assessee and found that its interest-free own funds far exceeded the amount of investments. Following the decisions relied upon by the assessee, the CIT(A) held that the investments were presumed to have been made out of interest-free own funds. He accordingly deleted the interest disallowance of Rs.80,00,000/-made under Rule 8D(2)(ii).

63. With regard to Rule 8D(2)(iii), the CIT(A) held that only those investments which had actually yielded exempt dividend income during the relevant year could be considered. Since the assessee had earned dividend only from Alcon Cement Company Private Limited and Aakaash Manufacturing Company Private Limited, the CIT(A) restricted the relevant value of investments to Rs.28.26 crores. Applying the prescribed rate of 0.5%, he determined the disallowance under Rule 8D(2)(iii) at Rs.14,13,000/-.

64. The CIT(A), however, rejected the assessee’s contention that strategic investments were outside the scope of section 14A. Relying upon the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] (SC) and the decision of the Mumbai Bench in Welspun India Ltd. v. DCIT, he held that investments made for acquiring or retaining a controlling or strategic interest were also required to be considered for the purpose of section 14A if they yielded exempt income.

65. The CIT(A) accordingly restricted the total disallowance under section 14A from Rs.2,09,19,256/- to Rs.50,32,256/-, comprising the suo motu disallowance of Rs.36,19,256/- and the disallowance of Rs.14,13,000/- under Rule 8D(2)(iii). After giving credit for the suo motu disallowance, the additional amount sustainable under the normal provisions was determined in the appellate order at Rs.14,32,256/-.

66. There is an apparent arithmetical inconsistency in the appellate order. The disallowance of Rs.36,19,256/- plus Rs.14,13,000/- aggregates to Rs.50,32,256/-, and after reducing the suo motu disallowance of Rs.36,19,256/-, the balance would be Rs.14,13,000/-. However, the CIT(A) recorded the net amount as Rs.14,32,256/-, and the Revenue has also adopted Rs.14,32,256/- in its ground of appeal.

67. Insofar as the computation of book profit under section 115JB was concerned, the CIT(A) accepted the assessee’s contention that the amount computed under section 14A read with Rule 8D could not be directly added under clause (f) of Explanation 1 to section 115JB. The CIT(A) relied upon Bengal Finance & Investments Pvt. Ltd., the Special Bench decision in Vireet Investment Pvt. Ltd. and the Tribunal’s order in the assessee’s own case for A.Y. 2013-14, which in turn had followed the order for A.Y. 2008-09.

68. Finding no change in the material facts, the CIT(A) directed the AO not to add the disallowance computed under section 14A read with Rule 8D while determining the book profit under section 115JB. The entire adjustment of Rs.2,09,19,256/- made by the AO in the computation of book profit was accordingly deleted.

69. The learned AR submitted that, insofar as the appeals filed by the Revenue are concerned, the CIT(A) had examined the issue in detail after considering the facts of each year and the judicial precedents applicable thereto, including the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023. The learned AR submitted that the CIT(A) had not deleted the disallowance in its entirety under the normal provisions but had restricted it after examining each component of Rule 8D separately.

70. The learned AR further submitted that the CIT(A) had not granted relief merely by following the decisions rendered in the assessee’s own case for the preceding assessment years but had also independently examined and decided the issue on merits. The CIT(A) considered the nature of the exempt income, the investments which had yielded such income, the availability of interest-free own funds, the assessee’s suo motu disallowance and each component of the computation made by the AO under Rule 8D.

71. The learned DR, on the other hand, relied upon the orders of the AO.

72. We have considered the rival submissions and perused the material placed on record. We find that the CIT(A) decided the issue on merits after examining the availability of interest-free own funds, the investments which yielded exempt income and the separate components of the disallowance computed under Rule 8D. The CIT(A) also followed the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023.

73. In A.Y. 2013-14, the assessee challenged the disallowance sustained under Rule 8D(2)(iii). The Co-ordinate Bench, in paragraph 7, referred to its earlier decision for A.Y. 2008-09 and reproduced the following operative findings:

“13. So far as disallowance of other administrative expenditure is considered, it is observed that Hon’ble Delhi ITAT in the case of Vireet Investment Pvt. Ltd. [165 ITD 27] has held as under:

‘Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 – Expenditure incurred in relation to exempt income not includible in total income – Assessment year 2008-09 – Whether only those investments are to be considered for computing average value of investment which yielded exempt income during year – Held, yes [Para 11.16][Matter remanded]’

14. The above referred decision has been followed by co-ordinate Bench in the case of DCIT v. Shree Global Tradefin Ltd. in ITA No. 1374/Mum/2022 dated 22nd December, 2022.”

74. After considering the decision in Vireet Investment Pvt. Ltd. and the subsequent decision in DCIT v. Shree Global Tradefin Ltd. , the Co-ordinate Bench recorded the following conclusion:

“15. Considering the finding given by Coordinate Bench, the Assessing Officer is directed to re-work disallowance u/s.14A under rule 8D(2)(iii) on investment which has yielded exempt income and consider only those investments which yielded the exempt income. The assessee gets the relief accordingly. This ground of appeal is partly allowed.”

75. In the Revenue’s appeal for A.Y. 2013-14, the Revenue challenged the partial deletion of the disallowance under section 14A. In paragraph 59, the Co-ordinate Bench reproduced the Revenue’s ground as under:

“1. On the facts and in the circumstances of the case and in law the ld. CIT(A) erred in partly deleting the disallowance made u/s 14A rwr. 8D(2) of the IT Rules, 1962, when the assessee itself disallowed only direct expenses related to exempt income, especially when the Hon’ble Supreme Court in the case of Maxopp Investment Ltd v. CIT has held that the principle of apportionment of expense is engrained in section 14A of the Act.”

76. The Co-ordinate Bench disposed of the Revenue’s ground in paragraph 60 as under:

“60. This ground of appeal is similar to Ground No. 1 of grounds of appeal raised by the assessee for the A.Y. 2013-14 and the decision taken therein shall apply mutatis-mutandis to the ground raised by the revenue. We order accordingly.”

77. Thus, the Co-ordinate Bench accepted the principle that, for the purposes of Rule 8D(2)(iii), only those investments which actually yielded exempt income during the relevant previous year were required to be considered. The corresponding challenge raised by the Revenue was also rejected.

78. Applying the aforesaid decision to the year-specific position, for A.Y. 2014-15, the CIT(A) found that the assessee’s interest-free own funds amounted to Rs.7,791.72 crores as on 31.03.2013 and Rs.8,186.68 crores as on 31.03.2014. The own funds substantially exceeded the investments. The Revenue has not established any direct nexus between the borrowed funds and the investments. The CIT(A) was, therefore, justified in deleting the interest disallowance of Rs.80,00,000/- made under Rule 8D(2)(ii).

79. The exempt dividend income for A.Y. 2014-15 was received from Alcon Cement Company Private Limited and Aakaash Manufacturing Company Private Limited. The corresponding investments amounted to Rs.22.25 crores and Rs.6.01 crores, respectively, aggregating to Rs.28.26 crores. Following the principle approved by the Co-ordinate Bench in A.Y. 2013-14, the CIT(A) correctly considered only these dividend-yielding investments and determined the disallowance under Rule 8D(2)(iii) at Rs.14,13,000/-. The direct expenditure of Rs.36,19,256/- voluntarily disallowed by the assessee was retained, and the total disallowance was restricted to Rs.50,32,256/-.

80. The appellate order records the net addition at Rs.14,32,256/-, though the difference between Rs.50,32,256/-and Rs.36,19,256/- works out to Rs.14,13,000/-. Since the assessee has not challenged the amount sustained and the Revenue has itself adopted Rs.14,32,256/- in its ground, we do not enlarge the scope of the Revenue’s appeal on account of this apparent arithmetical inconsistency.

81. For A.Y. 2015-16, the interest-free own funds amounted to Rs.8,186.68 crores as on 31.03.2014 and Rs.8,436.98 crores as on 31.03.2015. As against these funds, the investments were Rs.176.81 crores and Rs.279.04 crores, respectively. Thus, the interest-free own funds were many times the value of the investments. In the absence of any nexus between the borrowed funds and the investments, the CIT(A) correctly deleted the disallowance of interest expenditure under Rule 8D(2)(ii).

82. The dividend-yielding investments for A.Y. 2015-16 comprised Rs.22.25 crores in Alcon Cement Company Private Limited, Rs.36.81 crores in Asian Concretes and Cements Private Limited and Rs.6.01 crores in Aakaash Manufacturing Company Private Limited, aggregating to Rs.65.07 crores. Following the decision for A.Y. 2013-14, the CIT(A) determined the disallowance under Rule 8D(2)(iii) at Rs.33,00,000/-. Together with the suo motu disallowance of Rs.44,04,678/-, the total disallowance was restricted to Rs.77,04,678/-, resulting in a net addition of Rs.33,00,000/-.

83. For A.Y. 2016-17, the average investment base adopted by the AO was approximately Rs.276.80 crores, whereas the opening interest-free own funds amounted to Rs.8,436.98 crores. Thus, even the opening own funds were substantially higher than the investments. The exact closing figures were not separately reproduced by the CIT(A). However, the Revenue has not brought any material on record to demonstrate that the availability of own funds had materially changed during the year or that the borrowed funds were directly utilised for making investments.

84. The CIT(A) recorded that the facts, the findings of the AO and the submissions of the assessee for A.Y. 2016-17 were identical to those considered in detail for A.Y. 2014-15. He accordingly followed his findings for A.Y. 2014-15 and partly allowed the ground. The Revenue’s Ground No. i proceeds on the basis that the disallowance of Rs.2,39,77,030/- made by the AO was restricted to Rs.50,32,256/-. In the absence of any contrary material brought by the Revenue, no interference with the decision of the CIT(A) is warranted.

85. The deletion of the interest disallowance under Rule 8D(2)(ii) is also supported byCommissioner of Income-tax v. Reliance Utilities & Power Ltd. [2009] 221 CTR 435/313 ITR 340 (Bombay), South Indian Bank Ltd. v. Commissioner of Income-tax [2021] (SC). Where sufficient interest-free own funds are available and the Revenue fails to establish a nexus between the borrowed funds and the investments, the investments are presumed to have been made out of such interest-free funds.

86. The Revenue has also relied upon the Explanation inserted in section 14A by the Finance Act, 2022. The said Explanation deals with the applicability of section 14A where exempt income has not accrued, arisen or been received during a particular previous year. In all the years under consideration, the assessee had admittedly earned exempt dividend income. The dispute is confined to the quantification of the disallowance. The Explanation does not negate the presumption arising from the availability of sufficient interest-free funds, nor does it require investments which did not yield exempt income during the relevant year to be included in the computation under Rule 8D(2)(iii). The reliance placed by the Revenue on the said Explanation is, therefore, misplaced.

87. We shall now deal with the adjustments made while computing book profit under section 115JB. The AO added Rs.2,09,19,256/- for A.Y. 2014-15, Rs.2,05,01,071/- for A.Y. 2015-16 and Rs.2,39,77,030/- for A.Y. 2016-17 by adopting the amounts computed under section 14A read with Rule 8D. The CIT(A) deleted these adjustments.

88. This issue was specifically considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. In paragraph 124, the Co-ordinate Bench reproduced the Revenue’s ground as under:

“13. On the facts and in the circumstances of the case & in law the Ld. CIT(A) erred in deleting the addition of interest expenses to earn dividend income in computing Book Profit u/s. 115JB of the Act (Rs.1,16,00,000/-).”

89. In paragraphs 125 and 126, the Co-ordinate Bench recorded that the learned DR relied upon the order of the AO, whereas the learned AR relied upon the decision in the assessee’s own case for A.Y. 2008-09.

90. In paragraph 127, the Co-ordinate Bench reproduced the relevant findings from the order for A.Y. 2008-09, including the following operative portion:

“135. Considered the rival submissions and material placed on record. The Assessing Officer has made disallowance u/s 14A while computing income as per normal provisions of the Act as well as book profit u/s 115JB of the Act. The disallowance made by Assessing Officer u/s 14A is already deleted in proceeding paras hence consequential adjustment made while computing book profit u/s 115JB cannot be made. On this issue, coordinate bench in the case of Ambuja Cement Limited. held as under:

’25. Having heard the rival contentions and having perused the material on record, we are of the considered view that the assessee deserves to succeed in this plea for the reason that, eventually, there is no disallowance under section 14A on the facts of this case, and, in any event, the issue is covered, as regards the question of adjustment of book profits under section 115JB for the 14A disallowance, in favour of the assessee, by a special bench decision in the case of ACIT v. Vireet Investments Pvt Ltd (Del SB)]. The assessee gets relief on this point as well. ‘

136. Considering such facts and decisions referred supra, it is held that disallowance u/s 14A cannot be made while computing book profit u/s.115JB of the Act. This ground of appeal in departmental appeal is dismissed.”

91. Thereafter, in paragraph 128, the Co-ordinate Bench concluded as under:

“128. Respectfully following the above decision and following the principle of consistency, the view taken by the Tribunal in A.Y.2008-09 is respectfully followed, accordingly, ground raised by the Revenue is dismissed.”

92. The ratio of the aforesaid decision is that the computation mechanism prescribed in Rule 8D cannot be mechanically imported into clause (f) of Explanation 1 to section 115JB. Any addition under clause (f) has to be independently determined with reference to the expenditure debited to the profit and loss account and found to be relatable to exempt income.

93. In the present years, the AO did not undertake any such independent examination. He merely carried the amounts computed under section 14A read with Rule 8D into the computation of book profit. The facts and the statutory provisions are identical to those considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. The Revenue has neither pointed out any distinguishing feature nor brought to our notice any subsequent binding decision taking a contrary view.

94. Accordingly, the CIT(A) was justified in deleting the adjustments of Rs.2,09,19,256/- for A.Y. 2014-15, Rs.2,05,01,071/- for A.Y. 2015-16 and Rs.2,39,77,030/- for A.Y. 2016-17 made while computing book profit under section 115JB.

95. In view of the foregoing discussion and respectfully following the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14, we uphold the orders of the CIT(A). Consequently, Ground Nos. i and ii and Ground No. xxvi for A.Y. 2014-15; Ground Nos. iii, iv and xxiv for A.Y. 2015-16; and Ground Nos. i, ii and xviii for A.Y. 2016-17 raised by the Revenue are dismissed.

96. At this stage, we also take up Ground No. 2 raised by the assessee in its cross-objection for A.Y. 2015-16, since it arises from the same disallowance under section 14A read with Rule 8D. The said ground reads as under:

“2. In law and facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the disallowance of Rs.33,00,000/- as expenses incurred towards earning exempt dividend income u/s 14A r.w.r. 8D by considering investments which have yielded dividend income, without appreciating the fact that appellant has already made suo-moto disallowance of Rs.44,04,678/- in the return of income, thus no disallowance is required to be made.”

97. Through this ground, the assessee challenges the balance disallowance of Rs.33,00,000/- sustained by the CIT(A) under Rule 8D(2)(iii). Since the Revenue has challenged the relief granted by the CIT(A), while the assessee seeks deletion of the amount sustained by him, both sets of grounds are interconnected. Accordingly, Ground No. 2 of the cross-objection is taken up and adjudicated together with Ground Nos. iii and iv raised by the Revenue for A.Y. 2015-16, to avoid repetition of the common facts and legal discussion.

98. The learned AR submitted that, after considering the factual matrix, the CIT(A) determined the disallowance under section 14A read with Rule 8D at Rs.33,00,000/-. However, the assessee had already made a higher suo motu disallowance of Rs.44,04,678/-in its return of income. It was submitted that once the disallowance determined by the CIT(A) on the basis of the investments yielding exempt income amounted to Rs. 33,00,000/-, and the assessee had already offered Rs.44,04,678/- as disallowance, no further disallowance survived under section 14A. The suo motu disallowance made by the assessee exceeded the amount determined by the CIT(A) by Rs.11,04,678/-.

99. The learned AR contended that the CIT(A) erred in sustaining Rs.33,00,000/- over and above the suo motu disallowance of Rs.44,04,678/-. According to him, the amount determined in accordance with Rule 8D ought to have been adjusted against the disallowance already offered by the assessee and could not have been treated as an additional disallowance.

100. The learned AR accordingly submitted that, since the assessee had already disallowed an amount higher than the amount determined by the CIT(A), no further addition was called for. He, therefore, prayed that the additional disallowance of Rs.33,00,000/- be deleted and Ground No. 2 of the crossobjection be allowed.

101. We have considered the rival submissions and perused the material placed on record. The limited contention of the assessee is that the CIT(A), after considering the investments which had actually yielded exempt income, determined the disallowance under Rule 8D(2)(iii) at Rs.33,00,000/-, whereas the assessee had already made a higher suo motu disallowance of Rs.44,04,678/-in its return of income. Therefore, according to the assessee, no further disallowance survived.

102. We find that the suo motu disallowance of Rs.44,04,678/-was made by allocating the employee costs and overhead expenditure of the Treasury and Investment Group attributable to the investment activity. Thus, the amount already disallowed by the assessee covered the administrative expenditure incurred in relation to the exempt income.

103. The CIT(A) computed the disallowance at Rs.33,00,000/- by applying Rule 8D(2)(iii) to the investments of Rs.65.07 crores which had yielded exempt dividend income during the relevant year. However, instead of giving credit for the amount of Rs.44,04,678/- already disallowed by the assessee, the CIT(A) sustained Rs.33,00,000/- as a further disallowance over and above the suo motu disallowance.

104. In our considered view, once the disallowance attributable to the relevant dividend-yielding investments was determined at Rs.33,00,000/-, the amount already offered by the assessee was required to be taken into account. The suo motu disallowance of Rs.44,04,678/- exceeded the amount computed by the CIT(A) by Rs.11,04,678/-. In the absence of any finding that the amount of Rs.33,00,000/- represented expenditure of a distinct nature not covered by the employee costs and overhead expenditure already disallowed by the assessee, the same could not be sustained as an additional disallowance.

105. The substance of the expenditure already disallowed by the assessee has to be considered, and not merely the nomenclature under which it was placed in the Rule 8D computation. Since the suo motu disallowance covered the employee costs and overheads attributable to the investment activity, sustaining a further formula-based disallowance for administrative expenditure would result in duplication.

106. We accordingly hold that the disallowance under section 14A for A.Y. 2015-16 is to be restricted to Rs.44,04,678/- already made by the assessee in its return of income. The additional disallowance of Rs.33,00,000/- sustained by the CIT(A) is deleted. Consequently, Ground No. 2 raised by the assessee in its crossobjection is allowed.

Sr. No.4 – Allowability of pre-operative expenditure as revenue expenditure

107. The next common issue arising in these appeals relates to the allowability of pre-operative expenditure incurred by the assessee in connection with the expansion and modernisation of its existing facilities and the setting up of new units in the same line of business. The AO treated the expenditure as capital in nature principally on the ground that it had been incurred before the commencement of commercial production and had been capitalised by the assessee in its books of account. The CIT(A), however, held that the character of the expenditure had to be determined with reference to its true nature and purpose and not merely by the accounting treatment given in the books. On finding that the expenditure related to employee remuneration, travelling, maintenance, stores and spares, power and fuel, professional charges and other revenue items incurred for the expansion or modernisation of the assessee’s existing cement business, the CIT(A) allowed the claim under section 37(1). The Revenue is aggrieved by the aforesaid relief. The year-wise particulars are as under:

Particulars	A.Y. 2014-15	A.Y. 2015-16	A.Y. 2016-17
Revenue’s grounds	Ground Nos. viii, ix and x	Ground Nos. xiii, xiv and xv	Ground Nos. iii, iv and v
Total pre operative expenditure	Rs.59,46,60,788/-	Rs.71,22,82,804/-	Rs.70,92,64,826/-
Capital expenditure identified by the assessee	Rs.32,58,26,570/-	Rs.24,39,04,752/-	Rs.11,32,41,445/-
Expenditure claimed as revenue	Rs.26,88,34,218/-	Rs.46,83,78,052/-	Rs.59,60,23,389/-
Amount disallowed by the AO	Rs.26,88,34,218/-	Rs.46,83,78,052/-	Rs.59,60,23,389/-
Amount allowed by the CIT(A)	Rs.26,88,34,218/-	Rs.46,83,78,052/-	Rs.59,60,23,389/-

108. The AO held that the expenditure was capital in nature because it had been incurred during the construction period and before the commencement of commercial production or before the relevant assets were put to use. The AO also relied upon the fact that the assessee had capitalised the expenditure under capital work-in-progress or fixed assets in its books of account. He accordingly disallowed the expenditure claimed as revenue.

109. The CIT(A) found that the AO had not examined the true nature of the individual items of expenditure and had treated the entire claim as capital expenditure merely because it had been incurred before the commencement of production and capitalised in the books. The CIT(A) observed that the expenditure related to employee remuneration, travelling, maintenance, stores and spares, power and fuel, professional charges and other revenue items incurred for the expansion or modernisation of the existing business. The projects either represented the expansion of existing units or the setting up of new units in the same line of business, with common management, control and business organisation. The CIT(A) held that the accounting treatment given by the assessee was not conclusive of the character of the expenditure for income-tax purposes. Since the expenditure did not relate to the acquisition of capital assets and was incurred for the expansion of the existing business, it was allowable as revenue expenditure under section 37(1). Following the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 and the orders for the preceding years, the CIT(A) deleted the disallowances.

110. The learned AR relied upon the orders of the CIT(A) and submitted that the issue was squarely covered in favour of the assessee by the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023. It was submitted that the Co-ordinate Bench had held that pre-operative expenses comprising salaries, wages, travelling, professional fees and other routine business expenditure incurred in connection with the expansion of the existing business or setting up of units in the same line of business were allowable as revenue expenditure, irrespective of their treatment in the books of account.

111. The learned AR submitted that the facts in the years under consideration were identical and that the Revenue had not pointed out any distinguishing feature. He accordingly prayed that the orders of the CIT(A) deleting the disallowances be upheld and the corresponding grounds raised by the Revenue be dismissed.

112. We have considered the rival submissions. The identical issue was decided in favour of the assessee by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023. In paragraphs 70 and 71, the Bench considered and reproduced the decision rendered in the assessee’s own case for A.Y. 2009-10. Thereafter, in paragraph 72, following the earlier decision and the principle of consistency, the Bench upheld the deduction and dismissed the corresponding ground raised by the Revenue.

113. The ratio emerging from the aforesaid decision is that the deductibility of expenditure is governed by its true nature and purpose and not by its nomenclature or treatment in the books of account. Expenditure on salaries, wages, travelling, repairs, maintenance, stores, power, professional charges and other operating expenses does not acquire a capital character merely because it is incurred during the expansion or setting up of another unit of an existing business. Unless the expenditure is directly attributable to the acquisition or installation of a capital asset, it remains allowable as revenue expenditure.

114. In paragraph 71, while reproducing paragraphs 72 and 73 of the order for A.Y. 2009-10, the Co-ordinate Bench relied upon its decision in the case of Ambuja Cement Ltd. v. ACIT/DCIT [IT Appeal Nos. 3307 (Mum) of 2015 and 2428 (Mum) of 2019, dated 7-11-2022]. Paragraphs 99 to 103 of the decision in Ambuja Cement Limited held that capitalisation of an expenditure in the books is not conclusive of its character under the Act. In paragraph 102 thereof, reliance was placed on the judgment of the Hon’ble Delhi High Court in CIT v. Havells India Ltd. [IT Appeal Nos. 55 and 57 of 2012, dated 21-5-2012], for the proposition that accounting treatment cannot override the legal nature of expenditure.

115. The above view also finds support fromCommissioner of Income-tax v. Rane (Madras) Ltd. [2008] 215 CTR 250/[2007] 293 ITR 459 (Madras), Commissioner of Income-tax v. Relaxo Footwears Ltd. [2007] 293 ITR 231 (Delhi), Reliance Footprint Ltd. v. Assistant Commissioner of Income-tax, Circle 10(3) 29 ITR(T) 82/63 SOT 124 (Mumbai)/ITA No. 5997/Mum/2011 andAssistant Commissioner of Income-tax- 6 (3), Mumbai v. Gravis Foods (P.) Ltd. (Mumbai)/ITA No. 1051/Mum/2013, referred to in paragraph 70 of the decision reproduced in paragraph 71 of the order for A.Y. 201314.

116. Respectfully following the binding decisions of the Coordinate Bench in the assessee’s own case, and there being no distinguishing feature brought on record by the Revenue, we uphold the orders of the CIT(A) allowing the pre-operative expenditure as revenue expenditure. Consequently, the relevant grounds raised by the Revenue for A.Ys. 2014-15, 2015-16 and 2016-17 are dismissed.

Sr. No. 5 – Transfer pricing adjustment in respect of technical services availed from Holcim Group Support Limited

117. The Revenue has raised three identical grounds for A.Ys. 2014-15 and 2016-17. These grounds in each year raise connected objections concerning: first, the quantum and determination of the arm’s-length price; second, proof of actual rendition of services and benefits received; and third, the appropriateness of TNMM vis-a-vis the estimated man-hour valuation adopted by the TPO. Year-wise details are tabulated below:

A.Y.	Revenue’s grounds	Amount paid to AE	ALP determined by TPO	TP adjustment deleted by CIT(A)
2014-15	Ground Nos. xiii to xv	Rs.1,23,20,127/-	Rs.66,00,000/-	Rs.52,96,235/-
2016-17	Ground Nos. vi to viii	Rs.1,23,20,127/-	Rs.66,00,000/-	Rs.52,96,235/-

118. The TPO observed that the assessee had availed technical services from its associated enterprise concerning a course on ready-mix concrete, seminar participation and aggregates and construction material. According to the TPO, the assessee had furnished only the agreement and had failed to produce sufficient evidence demonstrating the actual rendition of services, the benefits derived therefrom and the functions performed, assets employed and risks assumed by the associated enterprise. The TPO, therefore, rejected the benchmarking undertaken by the assessee under TNMM.

119. The TPO thereafter estimated the arm’s-length price by considering 50 man-hours per month at Rs.11,000/- per manhour. On this basis, the arm’s-length price was determined at Rs.66,00,000/- and a transfer-pricing adjustment of Rs.52,96,235/- was made in each applicable year.

120. The CIT(A) observed that the services were specialised and unique and were provided according to the specific business requirements of the group entities. The valuation adopted by the TPO was based upon an estimated number of man-hours and an estimated hourly rate, without applying any prescribed method or identifying any comparable uncontrolled transaction.

121. The CIT(A) further found that an identical issue had been decided in favour of the assessee by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. Following paragraphs 97 to 99 of the said decision and finding no material change in the relevant facts, the CIT(A) deleted the transfer-pricing adjustment of Rs.52,96,235/- for both the years.

122. The learned AR relied upon the order of the CIT(A) and submitted that the TPO had not determined the arm’s-length price of the services at nil. Inviting our attention to pages 18 and 19 of the TPO’s order, the learned AR pointed out that the TPO himself proceeded to estimate the value of the services stated to have been rendered by the associated enterprise. The TPO estimated the services at 50 man-hours per month, aggregating to 600 man-hours during the year, and adopted a rate of Rs.11,000/- per man-hour. On this basis, the TPO determined the arm’s-length price at Rs.66,00,000/- and restricted the adjustment to Rs.52,96,235/- as against the payment of Rs.1,18,96,235/- concerning aggregates and construction material services.

123. The learned AR submitted that the determination of a positive arm’s-length price of Rs.66,00,000/- necessarily proceeds on the factual premise that services were rendered by the associated enterprise. Therefore, the Revenue’s contention that the assessee failed to establish that any services were received was contrary to the TPO’s own determination. Once the receipt of services was accepted, the controversy could only concern their arm’s-length valuation.

124. The learned AR further submitted that the valuation adopted by the TPO was merely an estimate. Neither the estimate of 50 man-hours per month nor the rate of Rs.11,000/- per manhour was supported by any comparable uncontrolled transaction, agreement or other objective material. The TPO had not applied any of the prescribed methods while substituting the assessee’s benchmarking under TNMM with an ad hoc man-hour computation. Accordingly, the learned AR contended that the CIT(A) was justified in deleting the adjustment by following paragraphs 97 to 99 of the Co-ordinate Bench’s decision in the assessee’s own case for A.Y. 2013-14.

125. We have considered the rival submissions and perused the material placed on record. The TPO recorded that the assessee had paid Rs.1,23,20,127/- to its associated enterprise for a course on ready-mix concrete, seminar participation and services relating to aggregates and construction material. Although the TPO questioned the adequacy of the supporting evidence and the quantification of the benefits, he did not determine the arm’s-length price at nil. Instead, he estimated the services at 50 manhours per month, aggregating to 600 man-hours during the year, and valued them at Rs.11,000/- per man-hour. On this basis, the TPO determined a positive arm’s-length price of Rs.66,00,000/-and made an adjustment of Rs.52,96,235/-.

126. The aforesaid computation shows that the TPO attributed a positive value to the services. Therefore, the adjustment is not founded upon a categorical determination that no services were rendered. The objection of the TPO was essentially regarding the adequacy of the evidence and the arm’s-length valuation of the services. However, neither the estimate of 600 man-hours nor the rate of Rs.11,000/- per man-hour was supported by any comparable uncontrolled transaction or other objective material. The TPO rejected TNMM adopted by the assessee but substituted it with an estimated man-hour computation which is not one of the prescribed methods under section 92C(1) of the Act.

127. We find that the issue is covered by the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14. In paragraph 87 of that order, the Co-ordinate Bench noted that the TPO had rejected TNMM and estimated the value of technical services received from Holcim Group Support Limited by adopting 8,000 man-hours at Rs.10,000/- per man-hour. The corresponding adjustment was deleted in paragraphs 90 to 94.

128. In paragraph 90, the Co-ordinate Bench applied the judgment of the Hon’ble Bombay High Court in Principal Commissioner of Income-tax-4, Pune v. Vishay Components India (P.) Ltd. (Bombay)/Tax Appeal No.1643 of 2016, dated 18.02.2019. The relevant ratio reproduced therein reads as under:

“The Revenue has not been able to show any material difference in the subject assessment year which would justify a change in the most appropriate method (TNM method) adopted while benchmarking the international transactions.”

129. Thus, where TNMM has been consistently accepted for benchmarking identical transactions and the Revenue does not establish any material change in facts, the method cannot be discarded in a subsequent year without valid reasons.

130. In paragraph 92, the Co-ordinate Bench found that the TPO had neither applied any prescribed method nor produced any comparable agreement to support the estimated man-hours or hourly cost. It further recorded that the TPO had not disputed the rendition of services. Referring toBrinks India (P.) Ltd. v. DCIT [IT Appeal No. 5462 (Mum) of 2018], the Bench held that an ad hoc unilateral valuation of intra-group services, without benchmarking the transaction with comparable uncontrolled transactions, was unsustainable.

131. Paragraph 93 of the earlier order reproduces the decision in CLSA India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 4(1)(1), Mumbai (Mumbai)/ITA No.1182/Mum/2017, wherein the following principle was laid down:

“Hence, the TPO is bound to determine the ALP by following one of the prescribed methods, however, we notice that in the present case the Ld. TPO has not followed any prescribed methods and made the transfer pricing adjustment by estimating the man hours and the cost of service per hour.”

132. The decision in CLSA India Private Limited (supra) also followed the judgment of the Hon’ble jurisdictional High Court in Commissioner of Income-tax-6 v. Merck Ltd. 290 CTR 226/389 ITR 70 (Bombay), for the proposition that a transfer-pricing adjustment made without following any prescribed method is unsustainable. Paragraph 93 further refers to the judgment in Johnson & Johnson Ltd., wherein an ad hoc determination of the arm’s-length price, unsupported by the exercise mandated under section 92C read with Rule 10B, was disapproved.

133. The Co-ordinate Bench also referred to Knorr-Bremse India (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-1, Faridabad (Delhi – Trib.) for the principle that TNMM may be applied to intra-group services when a reliable CUP is unavailable. It was held that CUP could be adopted only where comparable services were provided between independent enterprises or by the associated enterprise to an independent enterprise under comparable circumstances.

134. The facts concerning the nature of the services are also covered by paragraphs 95 to 99 of the order for A.Y. 2013-14. In paragraph 95, the Bench recorded that the assessee had received technical support in the areas of aggregates and construction material management and had participated in global group events and conferences. Paragraph 99 records the following finding:

“The Assessee has already submitted sufficient evidences to prove that actual services of AEs were taken by Assessee which mainly includes reimbursement of participation costs and license fees and actual support in a key business area (RMX or Concrete) of the Assessee and same is supported by terms of an agreement signed between the parties.”

135. On these findings, the Co-ordinate Bench upheld the deletion of the transfer-pricing adjustment. The ratio of the earlier order is, therefore, twofold. First, actual technical and businesssupport services demonstrated through the agreement, invoices, TPSR and related documentation cannot be disregarded merely by questioning the commercial benefit derived by the assessee. Secondly, even where the TPO disputes the assessee’s benchmarking, the arm’s-length price must be determined by applying one of the methods prescribed under section 92C(1), and not through an unsupported estimate of man-hours and hourly rates.

136. In the present years also, the TPO assigned a positive value of Rs.66,00,000/- to the services but failed to identify any comparable uncontrolled transaction or prescribed method supporting that valuation. No material distinction from the facts considered in A.Y. 2013-14 has been brought to our notice. We, therefore, find no infirmity in the CIT(A)’s decision deleting the adjustment by following the order of the Co-ordinate Bench in the assessee’s own case. Accordingly, Ground Nos. xiii to xv for A.Y. 2014-15 and Ground Nos. vi to viii for A.Y. 2016-17 raised by the Revenue are dismissed.

Sr. No. 6 – Deduction under section 80-IA in respect of rail system

137. The Revenue has raised three connected objections concerning the assessee’s claim of deduction under section 80-IA(4) in respect of its rail systems. The first objection is that the private rail systems do not constitute infrastructure facilities because they are not meant for public utility. The second is that the savings in road freight and loading and unloading expenses do not constitute income derived from an eligible infrastructure facility. The third is that, even if the rail systems are held eligible, the profits must be recomputed after allocating the proportionate head-office and common expenses.The year-wise grounds and amounts involved are as under:

A.Y.	Revenue’s grounds	Deduction claimed under section 80-IA(4)
2014-15	Ground Nos. xxi to xxiii	Rs.174,48,13,131/-
2015-16	Ground Nos. xix to xxi	Rs.186,91,41,231/-
2016-17	Ground Nos. xi to xiii	Rs.201,15,80,603/- (as recorded in the assessment order)

138. The assessee claimed deduction under section 80-IA(4)(i) in respect of rail systems comprising railway sidings, railway tracks, signalling systems and loading and unloading facilities established at its cement manufacturing units. The assessee treated these facilities collectively as a “rail system” falling within the definition of “infrastructure facility” in the Explanation to section 80-IA(4)(i).

139. The income of the rail-system undertakings was computed by taking the difference between the road freight and handling expenditure that would otherwise have been incurred for transporting goods to the nearest railhead and the railway tariff payable for transportation from the railway siding to the railhead. The transactions involving services rendered by the rail-system undertakings to the cement manufacturing units were reported in Form No.3CEB. The respective TPOs did not propose any adjustment to the arm’s-length price of these transactions.

140. The AO, however, held that the facilities developed by the assessee were merely private railway sidings meant for transportation of its own goods and were not infrastructure facilities of public utility. According to the AO, the agreements with the Railway Administration were only for laying and using private sidings and were not agreements for developing, operating and maintaining an infrastructure facility within the meaning of section 80-IA(4)(i).

141. The AO further observed that the railway wagons were operated by the Railway Administration, which also charged freight for their movement. The assessee’s activities were stated to be confined to the movement, loading and unloading of wagons within the factory premises. The AO, therefore, held that the assessee could not be regarded as operating a rail system.

142. The AO also relied upon the order of the CIT(A)-5, Mumbai, in the case of Ultratech Cement Ltd. for A.Y. 2010-11 and upon the disallowance made in the assessee’s own case for A.Y. 201112. On these grounds, the deduction claimed under section 80-IA(4) was denied. Without prejudice, the AO observed that if the rail systems were ultimately held eligible, proportionate headoffice expenses and CENVAT-related adjustments should be considered while computing the deduction.

The CIT(A) noted that the rail systems did not merely comprise private sidings but included railway tracks, signalling systems, loco sheds, wagon-loading machines, wagon tipplers, electrification, weighbridges, rerailing systems and other connected facilities. Through these facilities, the assessee undertook placement of wagons, loading and unloading, weighing, coupling and decoupling, rake formation and movement of wagons within the factory premises.

143. The CIT(A) further noted that the assessee had incurred the capital cost of developing the facilities and had entered into agreements with the Railway Administration governing their construction, operation and maintenance. Form No.10CCB, the audited accounts and the unit-wise profit and loss accounts were furnished in support of the claim.

144. The CIT(A) observed that deduction in respect of the rail systems had been allowed in the earlier years and that the decision of the CIT(A)-5, Mumbai, in Ultratech Cement Ltd., relied upon by the AO, had subsequently been reversed by the Tribunal. Reliance was also placed upon the decisions in Ultratech Cement Ltd. v. Asstt. CIT-2(2), Mumbai 186 TTJ 547 (Mumbai),JSW Steel Ltd. v. Pr. CIT [IT Appeal No. 4062 (Mum.) of 2017, dated 30-11-2017] and the decisions of the Tribunal in the assessee’s own case for A.Ys. 2011-12 and 2013-14.

145. Accordingly, the CIT(A) held that the rail systems constituted eligible infrastructure facilities and allowed the deduction under section 80-IA(4).

146. On the alternative question of allocation of expenses, the CIT(A) directed that head-office and other common expenses be apportioned on the basis of the expenditure incurred by the respective units, excluding directors’ remuneration and audit fees. The CIT(A) also held that CENVAT credit should not be added to the cost of the eligible undertakings. These directions are contained in paragraph 16.3.1 for A.Ys. 2014-15 and 2016-17 and paragraph 19.5 for A.Y. 2015-16.

147. Thus, the third ground raised by the Revenue, alleging that the CIT(A) ignored the allocation of head-office and common expenses, does not accurately reflect the operative directions of the CIT(A), who expressly directed proportionate allocation subject to the specified exclusions.

148. The learned AR relied upon the orders of the CIT(A) and submitted that the issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023. It was submitted that, in the said decision, the Co-ordinate Bench followed the order rendered in the assessee’s own case for A.Y. 2011-12 and allowed the deduction under section 80-IA(4) in respect of the rail systems. Since there was no material change in the relevant facts or the governing statutory provisions during the years under consideration, the learned AR submitted that the orders of the CIT(A) allowing the deduction deserved to be upheld.

149. We have considered the rival submissions and perused the material placed on record. The principal controversy is whether the rail systems developed by the assessee at its cement manufacturing units qualify as infrastructure facilities under section 80-IA(4)(i), notwithstanding that they are used for transporting the assessee’s own raw materials and finished goods. The Revenue has also questioned the computation of income on the basis of savings in road freight and loading and unloading expenditure and the allocation of head-office and common expenses.

150. We find that the issue of eligibility is squarely covered by the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023. In paragraph 36 of that order, the Bench identified the issue as the disallowance of deduction under section 80-IA in respect of the rail systems. In paragraph 37, it recorded that the identical issue had already been decided in favour of the assessee for A.Y. 2011-12 in ITA Nos.3139 and 3178/Mum/2019, order dated 28.02.2023. In paragraph 39, the Bench reproduced the findings rendered for A.Y. 2011-12, which, in turn, followed the decision concerning A.Y. 2009-10.

151. The earlier decision considered the very objections now raised by the Revenue, namely that the facilities were private railway sidings, were not meant for public utility, were operated by the Indian Railways, and that the income was computed notionally by reference to savings in freight and handling expenditure. After considering the agreements with the Railway Administration, the components forming part of the integrated rail systems and the manner in which the eligible income was computed, the Co-ordinate Bench held that the assessee satisfied the conditions prescribed under section 80-IA(4).

152. The decision for A.Y. 2011-12, reproduced in paragraph 39 of the order for A.Y. 2013-14, relied upon the decision in Ultratech Cement Ltd. (supra), wherein the order of the CIT(A), which formed the foundation of the disallowance made by the AO, had been reversed. It also referred to the decision in Ambuja Cement Ltd. in ITA Nos.1889 and 1241/Mum/2018 and connected appeals, order dated 07.11.2022. The relevant conclusion reproduced therein reads as under:

“The judgment of the Hon’ble Bombay High Court in the case of M/s. Ultra Tech Cement Ltd in ITA No.6070 of 2010 has confirmed the order of the ITAT. The Hon’ble Madras High Court in the case of M/s Tamilnadu Petro Products Ltd. v. ACIT 338 ITR 643 allowed deduction u/s 80IA of the Act where the facility was one of captive consumption. Thus even if the facility was for captive use, deduction u/s 80IA(4) cannot be denied.”

153. Thus, the requirement that a rail system must necessarily be available for use by the general public does not emerge from the amended provisions of section 80-IA(4). A rail system does not cease to be an infrastructure facility merely because it is used captively for transportation of the assessee’s raw materials and finished goods.

154. The earlier decision also examined the assessee’s agreements with the Railway Administration. The agreements provided for the construction of railway sidings, laying of tracks, signalling systems, provision of permanent-way material, loading and unloading arrangements and operation and maintenance of the facilities at the assessee’s cost. The fact that locomotives and wagons were operated under the supervision or control of the Indian Railways did not lead to the conclusion that the assessee had neither developed nor operated and maintained the infrastructure facility.

155. The method adopted for computing the income of the railsystem undertakings was also specifically noticed in the earlier order. The income was computed by comparing the road freight and handling expenditure that would otherwise have been incurred for transporting goods to the nearest railhead with the railway tariff payable for transportation through the rail systems. After considering this computation, the Co-ordinate Bench directed the AO to allow the deduction. The relevant conclusion reproduced in paragraph 39 reads as under:

“In view of above discussion and following decisions referred supra, claim of assessee is found to be correct and Assessing Officer is directed to allow deduction u/s.80IA on Rail Infrastructure.”

156. Thereafter, the Co-ordinate Bench concluded in paragraph 40 of its order for A.Y. 2013-14 as under:

“Respectfully following the above decision and following the principle of consistency, the view taken by the Tribunal in A.Y.2011-12 is respectfully followed, accordingly, ground raised by the assessee is allowed.”

157. In the years under consideration, the nature of the rail systems, the agreements with the Railway Administration and the basis of computing the eligible income remain unchanged. The Revenue has not brought on record any material difference in facts or any change in the governing statutory provisions. We, therefore, respectfully follow the decision of the Co-ordinate Bench in the assessee’s own case for A.Ys. 2011-12 and 2013-14 and uphold the finding of the CIT(A) that the assessee is eligible for deduction under section 80-IA(4) in respect of the rail systems.

158. As regards the allocation of head-office and common expenses, the Revenue’s ground proceeds on an incorrect factual premise that the CIT(A) ignored such allocation. Paragraph 16.3.1 of the orders for A.Ys. 2014-15 and 2016-17 and paragraph 19.5 of the order for A.Y. 2015-16 expressly direct the allocation of head-office and other common expenses on the basis of the expenditure incurred by the respective units, except directors’ remuneration and audit fees. The CIT(A) also held that CENVAT credit should not be added to the cost of the eligible undertakings. The computation of the deduction shall, therefore, be made in conformity with those directions and our findings on the related grounds concerning the allocation of common expenses and CENVAT credit.

159. For A.Y. 2016-17, the AO shall adopt the deduction of Rs.201,15,80,603/- recorded in paragraph 10.1 of the assessment order, subject to verification while giving effect to this order, since the figure of Rs.174,48,13,131/- appearing in the CIT(A)’s order pertains to A.Y. 2014-15.

160. Accordingly, Ground Nos. xxi to xxiii for A.Y. 2014-15, Ground Nos. xix to xxi for A.Y. 2015-16 and Ground Nos. xi to xiii for A.Y. 2016-17 raised by the Revenue are dismissed, subject to the aforesaid directions concerning the computation of the eligible deduction.

Sr. No. 7 – Allocation or apportionment of indirect Head Office expenses while computing deduction under sections 80-IA and 80-IC

161. We shall now deal with the next common issue concerning the allocation or apportionment of indirect head-office expenses while computing the deduction under sections 80-IA and 80-IC. This issue includes the basis of allocation, the categories of common expenditure liable to be apportioned, and the exclusion of expenses having no nexus with the eligible undertakings.

162. The assessee claimed deductions under sections 80-IA and 80-IC in respect of various captive power plants, rail systems and eligible cement manufacturing units. While computing the profits of the eligible undertakings, the assessee allocated expenses directly attributable to the respective units but did not allocate the general and indirect expenditure incurred at the head office.

163. The AO observed that, under section 80-IA(5), each eligible undertaking was required to be treated as a stand-alone unit. Consequently, all direct as well as proximate business expenditure incurred for the benefit of such undertaking was required to be considered while determining its eligible profit. According to the AO, the head-office expenditure was incurred for the benefit of the assessee’s business as a whole and, therefore, an appropriate portion thereof was necessarily attributable to the eligible units.

164. The expenditure identified by the AO for allocation included salaries, bonus, incentives, house-rent allowance, employeewelfare contributions, leave encashment, directors’ commission, training and business travel, consultancy charges, third-party services, office supplies, software support and maintenance, telecommunication, data communication and postage and courier charges. The AO, however, excluded expenditure such as corporate wealth tax, provision for doubtful advances and debts, interest on stockist deposits and builder finance, income tax and dividend distribution tax, which was considered unrelated to the power-generating undertakings.

165. The AO apportioned the identified head-office expenditure to the profit-making eligible units in the ratio of their adjusted turnover to the total turnover. For this purpose, the turnover of the captive power plants, after incorporating the arm’s-length-price adjustment made by the TPO, was adopted. In respect of the Gagal-1 undertaking eligible under section 80-IC, the AO also included the research and development expenditure incurred at the Thane Technical Service Centre and allocated the aggregate expenditure on the basis of turnover.

166. Before the CIT(A), the assessee contended that all expenditure directly connected with the eligible undertakings had already been debited in their respective accounts. The remaining head-office expenditure had no direct or proximate nexus with the eligible undertakings. Alternatively, it was submitted that, if any allocation was considered necessary, the same should be made with reference to the expenditure incurred by the eligible unit vis-a-vis the overall expenditure of the assessee, and not on the basis of turnover.

167. The CIT(A) held that the eligible units were required to be treated as stand-alone profit centres and, therefore, indirect expenditure incurred by the head office for their benefit could not be excluded altogether. The CIT(A), however, found that turnover was not a reasonable basis for allocation because there was no linear relationship between turnover and indirect expenditure. Following the orders of the Co-ordinate Bench Tribunal in the assessee’s own case for the earlier years, the CIT(A) directed that the head-office expenditure be apportioned in the ratio of the expenditure incurred by the respective eligible unit to the overall expenditure of the assessee. Directors’ remuneration and auditors’ fees were directed to be excluded from the allocation. The grounds of the assessee were accordingly partly allowed.

168. The year-specific details are as under:

Particulars	A.Y. 2014-15	A.Y. 2015-16	A.Y. 2016-17
Revenue’s grounds	Ground Nos. xviii and xix	Ground Nos. xvi and xvii	Ground Nos. xiv and xv
Deduction claimed under section 80-IA for power generating units	Rs.288,46,27,241/-	Rs.167,16,98,408/-	Rs.228,78,87,180/-
Indirect head office expenditure considered by AO	Rs.229,64,93,068/-	Rs.220,24,55,943/-	Rs.214,76,53,951/-
Adjusted turnover of profit-making eligible units adopted by AO	Rs.467,56,54,940/-	Rs.336,27,37,036/-	Rs.385,36,20,913/-
Head-office expenditure allocated by AO under section 80-IA	Rs.9,56,60,289/-	Rs.62,79,96,792/-	Rs.7,06,93,083/-
Additional section 80-IC particulars	Aggregate expenditure of Rs.237,00,04,387/, including R&D expenditure of Rs.1,70,42,308/-. The AO allocated Rs.15,83,91,301/-to the Gagal-1 unit	No separate current-year section 80-IC allocation is quantified in the relevant adjudication	No separate section 80-IC allocation is quantified in the assessment order
Basis adopted by AO	Adjusted turnover	Adjusted turnover. The assessee contended that turnover of Rs.1,179.35 crore was wrongly adopted instead of Rs.11,795.35 crore	Adjusted turnover
CIT(A)’s direction	Allocation on the basis of unit expenditure vis-avis overall expenditure, excluding directors’ remuneration and auditors’ fees	Same direction; AO also directed to verify the correct turnover figure	Same direction

169. For A.Y. 2015-16, the assessee contended that the allocation of Rs.62,79,96,792/- resulted from the AO adopting turnover of Rs.1,179.35 crore instead of Rs.11,795.35 crore and that, on the correct figure, the allocation would be Rs.6,27,89,830/-. The CIT(A) directed the AO to verify this factual claim.

170. For A.Y. 2016-17, the assessment order records indirect head-office expenditure of Rs.214,76,53,951/- and allocation of Rs.7,06,93,083/-. The figures of Rs.229,64,93,068/- and Rs.9,56,60,289/- reproduced in paragraphs 14.1 and 14.2 of the CIT(A)’s order appear to have been carried forward from the order for A.Y. 2014-15.

171. The learned AR relied upon the orders of the CIT(A) and submitted that the issue was covered by the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023. It was submitted that the Co-ordinate Bench, following the earlier orders for A.Ys. 2005-06 and 2008-09, had held that indirect head-office expenditure incurred for the benefit of the eligible undertakings was required to be apportioned. However, allocation on the basis of turnover was held to be inappropriate because turnover did not bear a linear relationship with such expenditure.

172. The learned AR further submitted that the Co-ordinate Bench directed the AO to allocate the head-office expenditure on the basis of the expenditure incurred by the respective eligible units vis-a-vis the overall expenditure of the assessee, after excluding auditors’ fees and CMA-related expenses. It was accordingly submitted that the CIT(A), having followed the aforesaid decision, had adopted the correct basis of allocation and no interference with the impugned orders was warranted.

173. We have considered the rival submissions and perused the material placed on record. The controversy is not whether common head-office expenditure can be allocated to the eligible undertakings, but concerns the appropriate basis of allocation and the exclusion of expenditure having no nexus with those undertakings.

174. Section 80-IA(5) requires the profits of an eligible undertaking to be computed as if the eligible business were the only source of income of the assessee. Therefore, expenditure incurred centrally by the head office for the benefit of an eligible undertaking cannot be ignored merely because it is not incurred or recorded in the books of that undertaking. At the same time, only expenditure having a direct or proximate connection with the eligible undertaking can enter into the computation. Expenditure specifically relatable to the non-eligible cement-manufacturing business cannot be apportioned to the eligible power-generating, rail-system or section 80-IC undertakings.

175. We find that the issue was considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ACC Ltd. v. DCIT/ACIT [IT Appeal Nos. 800 and 1171 (Mum) of 2022, dated 30-6-2023]/ITA Nos.800 and 1171/Mum/2022. In paragraph 26, the Bench identified the dispute as the allocation of proportionate headoffice expenditure while computing deductions under sections 80-IA and 80-IC. In paragraph 27, it recorded that the issue had been considered in the assessee’s own case for A.Y. 2008-09 in ITA Nos.6638/Mum/2018 and 268/Mum/2019, order dated 28.02.2023. The findings rendered for A.Y. 2008-09 were reproduced in paragraph 29.

176. In paragraph 37 of the earlier decision, as reproduced in paragraph 29 of the order for A.Y. 2013-14, the Co-ordinate Bench followed its order for A.Y. 2005-06. While dealing with cost-audit fees and subscription to CMA, it recorded the following finding:

“Before Ld.CIT(A), assessee has claimed that cost audit fees and subscription to CMA are in respect of cement manufacturing unit hence no allocation of such expenditure is required to be made. To that extent, Ld.CIT(A) has accepted the plea of assessee and such fact is not controverted by Ld. DR hence finding given by Ld.CIT(A) to that extent is upheld.”

177. The ratio is that expenditure shown to be specifically connected with the non-eligible cement-manufacturing business cannot be apportioned to the eligible undertakings merely because it is incurred or recorded at the head office.

178. The Co-ordinate Bench also relied upon paragraphs 108 and 109 of the decision in Ambuja Cement Ltd. in ITA Nos.1889 and 1241/Mum/2018 and connected appeals, order dated 07.11.2022. The relevant findings reproduced in paragraph 29 of the order for A.Y. 2013-14 read as under:

“We see no reasons to decline allocation of head office expenses to ensure that the profits of the eligible units are correctly worked out, on the basis of hypothetical independence embedded in the eligible units being treated on a standalone basis. To this extent, we reject the plea of the assessee. However, the basis of allocation as turnover is not really correct and reasonable, nor the relationship between the turnover and expenses always linear; the allocation would be more appropriate based on expenditure incurred by the units vis-a-vis overall expenditure.”

179. Thus, the earlier decision rejected the assessee’s principal contention that no head-office expenditure could be allocated. It, however, accepted the alternative contention that turnover was not a reasonable basis of allocation because the relationship between turnover and common expenditure was not necessarily linear. The appropriate basis was held to be the expenditure incurred by the eligible unit vis-a-vis the overall expenditure of the assessee.

180. The operative direction contained in paragraph 76 of the earlier decision, reproduced in paragraph 29 of the order for A.Y. 2013-14, reads as under:

“Assessing Officer is directed to allocate Head office expenses (other than auditor fees and CMA expenses) on the basis of expenditure incurred by the units vis-a-vis overall expenditure.”

181. The Co-ordinate Bench thereafter concluded in paragraph 30 of the order for A.Y. 2013-14 as under:

“Respectfully following the above decision and following the principle of consistency, the view taken by the Tribunal in A.Y.2008-09 is respectfully followed, accordingly, ground raised by the assessee is allowed.”

182. In the years under consideration, the AO allocated the headoffice expenditure on the basis of the adjusted turnover of the profit-making eligible units. No material distinguishing feature has been brought on record to justify departure from the basis approved by the Co-ordinate Bench. Accordingly, we uphold the CIT(A)’s direction that the common head-office expenditure should be apportioned in the ratio of the expenditure incurred by the respective eligible undertaking to the overall expenditure of the assessee and not on the basis of turnover.

183. We also uphold the exclusion of cost-audit fees and subscription to CMA, since these expenses were found to be specifically relatable to the cement-manufacturing business. Such expenditure cannot be allocated to the eligible undertakings in the absence of any nexus with those undertakings. The exclusions shall, however, remain confined to the categories of expenditure covered by the earlier orders and factually shown to relate exclusively to the non-eligible business.

184. For A.Y. 2015-16, the CIT(A) directed the AO to verify the assessee’s contention that turnover of Rs.1,179.35 crore was erroneously adopted instead of Rs.11,795.35 crore. Since the allocation is now required to be made on the basis of expenditure and not turnover, the AO shall recompute the allocation in accordance with the above directions after verifying the correct figures from the record.

185. For A.Y. 2016-17, the re-computation shall be based on the figures appearing in the assessment order, namely, total headoffice expenditure of Rs.214,76,53,951/- and allocation of Rs.7,06,93,083/-, and not the figures pertaining to A.Y. 2014-15 reproduced in the CIT(A)’s order.

186. Accordingly, Ground Nos. xviii and xix for A.Y. 2014-15, Ground Nos. xvi and xvii for A.Y. 2015-16 and Ground Nos. xiv and xv for A.Y. 2016-17 raised by the Revenue are dismissed, subject to re-computation by the AO in the manner indicated above.

Sr. No.8 – CENVAT credit adjustment while computing deduction under section 80-IA

187. We shall now deal with the next common issue concerning whether CENVAT credit availed on inputs, input services and capital goods is required to be included in the cost of the eligible undertakings while computing the deduction under section 80-IA.

188. The assessee claimed deduction under section 80-IA in respect of its captive power plants. In the accounts of the eligible undertakings, expenditure on raw materials, inputs and services was recorded net of CENVAT credit. The component representing excise duty, CENVAT and service tax was credited directly to the “CENVAT Receivable Account” without being routed through the profit and loss account of the respective captive power plant.

189. The AO observed that the inputs, raw materials and services on which CENVAT credit had arisen were directly connected with the operation of the captive power plants. According to the AO, section 80-IA(5) required the profits of each eligible undertaking to be computed on a stand-alone basis, as if the eligible business were the only source of income of the assessee. Therefore, the entire cost of inputs and services, including the embedded duties and taxes, was required to be debited while computing the true profit of the eligible undertaking.

190. The AO held that the assessee’s practice of debiting expenditure net of CENVAT credit resulted in an inflated profit of the eligible undertaking because the benefit of the credit was utilised by the cement-manufacturing units, while the corresponding duty component was not debited to the captive power plant. The AO, therefore, included the amount of CENVAT credit in the cost of the respective power-generating units and reduced the deduction allowable under section 80-IA accordingly.

191. Before the CIT(A), the assessee submitted that power generated by the captive power plants was transferred to its cement-manufacturing units and residential colonies. In respect of power supplied to the residential colonies, the proportionate CENVAT credit and service tax were already debited to the relevant accounts. In respect of transfers to the cementmanufacturing units, the CENVAT credit arising from the expenditure of the captive power plants was utilised by those manufacturing units.

192. The assessee further submitted that if the captive power plant were treated as a hypothetical independent unit under section 80-IA(5), the cement-manufacturing unit receiving the benefit of the CENVAT credit would necessarily have to reimburse the eligible undertaking for that credit. Thus, if the gross expenditure, including the duty component, were debited to the eligible undertaking, a corresponding amount representing reimbursement of CENVAT credit would also have to be credited as its income. The net effect on the profit of the eligible undertaking and the deduction under section 80-IA would consequently remain neutral.

193. The CIT(A) found that the issue was recurring and had been decided in favour of the assessee by the Co-ordinate Bench for A.Ys. 2011-12 and 2013-14. Following those decisions, the CIT(A) held that CENVAT credit availed on inputs, input services and capital goods should not be added to the cost of the eligible undertakings while computing the deduction under section 80-IA. The corresponding adjustments were accordingly deleted.The year-specific details are as under:

A.Y.	Revenue’s ground	CENVAT adjustment made by AO
2014-15	Ground No. xx	Rs.17,66,03,452/-
2015-16	Ground No. xviii	Rs.17,06,92,552/-
2016-17	Ground No. xvi	Rs.17,76,05,481/-

194. For A.Y. 2016-17, paragraphs 9.13 to 9.15 of the assessment order quantify the CENVAT adjustment at Rs.17,76,05,481/-. Paragraph 15.1 of the CIT(A)’s order, however, reproduces the figure of Rs.17,66,03,452/- pertaining to A.Y. 2014-15. The amount of Rs.17,76,05,481/- appearing in the assessment order should, therefore, be treated as the correct amount involved for A.Y. 2016-17.

195. The learned AR relied upon the orders of the CIT(A) and submitted that the issue was squarely covered in favour of the assessee by the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023. It was submitted that the Co-ordinate Bench, following the earlier order for A.Y. 201112, held that where expenditure was recorded net of CENVAT credit and the entire credit was utilised by the other units of the assessee, such accounting treatment did not distort the profits of the eligible undertakings.

196. The learned AR further submitted that, if the captive power plant were treated as a stand-alone undertaking under section 80-IA(5), the cement-manufacturing unit utilising the CENVAT credit would be required to reimburse the eligible undertaking to the same extent. Therefore, even if the gross expenditure were debited to the captive power plant, an equivalent amount would have to be credited as reimbursement, leaving its eligible profit unchanged. It was accordingly submitted that the CIT(A), having followed the binding decision in the assessee’s own case, rightly deleted the CENVAT adjustments.

197. We have considered the rival submissions and perused the material placed on record. The limited controversy is whether, while computing the profits of the eligible captive power plants under section 80-IA, the expenditure should be increased by the amount of CENVAT credit availed by the other manufacturing units of the assessee. The AO held that the eligible undertakings were required to be treated as independent undertakings under section 80-IA(5) and, therefore, the corresponding duties and taxes should form part of their expenditure. The CIT(A), following the orders of the Co-ordinate Bench in the assessee’s own case, deleted the adjustments.

198. We find that an identical issue arose in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022. In paragraph 32 of the order dated 30.06.2023, the Co-ordinate Bench noted that the issue had already been decided in favour of the assessee for A.Y. 2011-12 in ACC Ltd. v. ACIT/DCIT [IT Appeal Nos. 3139 and 3178 (Mum) of 2019, dated 28-2-2023]/ITA Nos. 3139 and 3178/Mum/2019, order dated 28.02.2023. The relevant findings were reproduced in paragraph 34 of the order. While interpreting the fiction contained in section 80-IA(5), the Tribunal, following its decision in the case of Ambuja Cement Ltd., held as under:

“All that this provision does is that it provides for the profits of the eligible unit being treated on a standalone basis, but then in case the Assessing Officer makes an adjustment for the payment which has earned the CENVAT credit, he must also make an adjustment for the corresponding CENVAT credit availed by any other unit of the assessee – other than the eligible unit. “

199. The Co-ordinate Bench further held:

“In any event, the fiction envisages under section 80IA(5) is to enable computation of profits on a standalone basis, rather than to increase the scope of profits itself and allocate notional expenditure to the eligible units.”

200. It was, therefore, concluded:

“Viewed thus, not accounting for the CENVAT credit does not, in our considered view, vitiate the profits of the eligible undertaking, as long as all such credits are fully availed by the other units as is the undisputed position anyway. What the assessee has done is that the expenses are debited net of the CENVAT credit availed. To this extent, we see no infirmity in the stand of the assessee.”

201. Accordingly, in paragraph 103 of the decision in Ambuja Cement Ltd., as reproduced in paragraph 34 of the order for A.Y. 2013-14, the Tribunal directed as under:

“In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned adjustment on account of CENVAT in the profits of the eligible units. The assessee gets the relief accordingly.”

202. Following the above decision, the Co-ordinate Bench ultimately concluded in paragraph 35 of its order for A.Y. 201314 as under:

203. The same principle applies to the years under consideration. Once the eligible captive power plants are treated as independent undertakings and their expenditure is notionally increased by the duty component giving rise to CENVAT credit, the corresponding benefit transferred to and availed by the other manufacturing units must necessarily be credited to the eligible undertakings. The fiction under section 80-IA(5) cannot be applied only for increasing the expenditure of the eligible undertakings while disregarding the corresponding reimbursement or benefit attributable to them. The assessee’s method of recording the expenditure net of CENVAT credit produces the same economic result and does not inflate the profits of the eligible undertakings.

204. No distinguishing feature in facts or law has been brought to our notice. We, therefore, find no infirmity in the order of the CIT(A) deleting the adjustments of Rs.17,66,03,452/- for A.Y. 2014-15, Rs.17,06,92,552/- for A.Y. 2015-16 and Rs.17,76,05,481/- for A.Y. 2016-17. In respect of A.Y. 2016-17, the figure of Rs.17,66,03,452/- mentioned by the CIT(A) appears to be an inadvertent reproduction of the figure relating to A.Y. 2014-15; the adjustment made by the AO, as recorded in paragraphs 9.13 to 9.15 of the assessment order, is Rs.17,76,05,481/- and the same shall stand deleted.

205. Accordingly, Ground No. xx for A.Y. 2014-15, Ground No. xviii for A.Y. 2015-16 and Ground No. xvi for A.Y. 2016-17 raised by the Revenue are dismissed.

Sr. No. 9 & 10 – Treatment of sales tax incentive or subsidy as a capital receipt under the normal provisions and Treatment of royalty refund as a capital receipt under the normal provisions

206. These issues arise only in the Revenue’s appeals for A.Ys. 2014-15 and 2015-16. No corresponding grounds have been raised by the Revenue for A.Ys. 2016-17 and 2018-19.

Particulars	A.Y. 2014-15	A.Y. 2015-16
Revenue’s grounds relating to sales-tax incentive	Ground No. iii	Ground Nos. v to vii
Sales-tax incentive treated as capital receipt by the CIT(A)	Rs.143,03,11,576/-	Rs.237,84,09,218/-
Revenue’s grounds relating to royalty refund	Ground Nos. iv to vii	Ground Nos. viii to xi
Royalty refund treated as capital receipt by the CIT(A)	Rs.26,45,44,672/-	Rs.31,18,38,263/-

207. During the assessment proceedings, the AO noticed that the assessee had excluded the sales-tax incentives received or receivable under the industrial incentive schemes of various State Governments from its taxable income by treating them as capital receipts. The assessee explained that the incentives were granted for encouraging substantial capital investment, establishment of new industrial units and expansion or modernisation of the existing units situated in industrially backward areas. It was contended that the character of the subsidy had to be determined with reference to the object and purpose of the relevant industrial policy and not with reference to the form or the stage at which the benefit was received.

208. The AO did not accept the explanation. According to the AO, the incentives became available after commencement of production and were quantified with reference to the sales tax or VAT paid by the respective units. The AO held that the immediate purpose of the incentives was to facilitate the carrying on of the existing business more efficiently and profitably. He further observed that the relevant schemes did not require the incentive amount to be utilised for acquiring any particular capital asset. On this basis, the AO concluded that the sales-tax incentives constituted recurring operational subsidies and were taxable as revenue receipts.

209. The AO also noticed that the assessee had excluded the refund of royalty received from the Government of Maharashtra in respect of minerals used by its Chanda unit by treating the same as a capital receipt. The assessee submitted that the royalty refund was granted under the Package Scheme of Incentives, 2007 framed pursuant to the Industrial Policy of the Government of Maharashtra. It was contended that the incentive was linked with the capital investment made for expansion and modernisation of the unit and, therefore, satisfied the purpose test applicable to capital subsidies.

210. The AO rejected the explanation. He held that royalty constituted an expenditure incurred in the course of carrying on the business and that its subsequent refund represented remission of a trading expenditure. The AO further observed that the nature of the royalty refund was not materially different from the sales-tax incentive already treated by him as a revenue receipt. He accordingly added Rs.26,45,44,672/- for A.Y. 2014-15 and Rs.31,18,38,263/- for A.Y. 2015-16 while computing the total income under the normal provisions.

211. For A.Y. 2014-15, the CIT(A), in paragraphs 9 to 9.3 of the appellate order, examined the industrial policies under which the respective units received the sales-tax incentives. The CIT(A) noted that the Bargarh unit was entitled to reimbursement of a prescribed portion of incremental VAT under the Odisha Industrial Policy, subject to the overall ceiling linked with the fixed-capital investment. The Chaibasa unit received the benefit under the Jharkhand Industrial Policy, 2001, which contemplated incentives for modernisation and expansion subject to the prescribed percentage of fixed-capital investment. The Chanda unit received the Industrial Promotion Subsidy under the Package Scheme of Incentives, 2007 of the Government of Maharashtra, with the overall benefit restricted with reference to the eligible fixed-capital investment. The Gagal-I unit received the benefit under the Himachal Pradesh General Sales Tax (Deferred Payment of Tax) Scheme, 2005, pursuant to the substantial expansion undertaken by that unit.

212. The CIT(A) held that the sales-tax incentives were granted under the respective industrial policies for encouraging capital investment, establishment, expansion and modernisation of industrial units. The method of quantifying or disbursing the incentives with reference to the sales tax or VAT paid did not alter their character. The CIT(A) also noticed that the issue was recurring and had been decided in favour of the assessee in the earlier assessment years, including A.Y. 2013-14. Accordingly, the CIT(A) held the sales-tax incentives aggregating to Rs.143,03,11,576/- to be capital receipts and directed the AO to delete the addition.

213. In paragraphs 10 to 10.2 of the appellate order for A.Y. 2014-15, the CIT(A) considered the refund of royalty of Rs.26,45,44,672/-. The CIT(A) observed that the refund was granted under the Maharashtra Industrial Policy and the Package Scheme of Incentives, 2007. Since the AO had treated the royalty refund as a revenue receipt by adopting the same reasoning as applied to the sales-tax incentives, the CIT(A), following his conclusion that the incentives under the industrial policy were capital in nature, held that the royalty refund also constituted a capital receipt. The corresponding addition was, therefore, deleted.

214. For A.Y. 2015-16, the CIT(A) dealt with the sales-tax incentives in paragraphs 12 to 12.5 of the appellate order. The CIT(A) found that the incentives received in respect of the Bargarh, Chanda and Chaibasa units arose under the same industrial policies and schemes considered in the earlier years. The AO had also made the addition by substantially following the reasoning adopted in the preceding assessment orders. The CIT(A) held that the issue was recurring and that the incentives were linked to industrial investment and expansion. Following the earlier orders in the assessee’s own case, including the order for A.Y. 2013-14 and the appellate order for A.Y. 2014-15, the CIT(A) treated the sales-tax incentives aggregating to Rs.237,84,09,218/- as capital receipts and directed deletion of the addition.

215. The royalty refund for A.Y. 2015-16 was considered in paragraphs 13 and 13.1 of the appellate order. The CIT(A) recorded that the amount of Rs.31,18,38,263/- represented refund of royalty received from the Government of Maharashtra in respect of the Chanda unit under the Package Scheme of Incentives, 2007. Since the AO had made the addition solely by applying the reasoning adopted for the sales-tax incentives and an identical refund had been treated as a capital receipt in A.Y. 2014-15, the CIT(A) directed deletion of the addition of Rs.31,18,38,263/-.

216. Year and unit specific details are tabulated below:

A.Y.	Issue	Revenue’s grounds	Unit and relevant industrial scheme	Amount added by the AO
2014-15	Sales-tax incentive	Ground No. iii	Bargarh, Odisha Industrial Policy, 2007	Rs.81,00,000/-
2014-15	Sales-tax incentive	Ground No. iii	Chanda, Maharashtra Package Scheme of Incentives, 2007	Rs.93,50,20,086/-
2014-15	Sales-tax incentive	Ground No. iii	Gagal-I, Himachal Pradesh General Sales Tax (Deferred Payment of Tax) Scheme, 2005	Rs.9,93,70,078/-
2014-15	Sales-tax incentive	Ground No. iii	Chaibasa, Jharkhand Industrial Policy, 2001	Rs.38,78,21,412/-
2014-15	Total sales-tax incentive	Ground No. iii		Rs.143,03,11,576/-
2014-15	Royalty refund	Ground Nos. iv to vii	Chanda unit, Maharashtra Package Scheme of Incentives, 2007	Rs.26,45,44,672/-
2015-16	Sales-tax incentive	Ground Nos. v to vii	Bargarh, Odisha Industrial Policy, 2007	(-) Rs.2,81,00,000/-
2015-16	Sales-tax incentive	Ground Nos. v to vii	Chanda, Maharashtra Package Scheme of Incentives, 2007	Rs.88,29,22,936/-
2015-16	Sales-tax incentive	Ground Nos. v to vii	Chaibasa, Jharkhand Industrial Policy, 2001	Rs.152,35,86,282/-
2015-16	Total sales-tax incentive	Ground Nos. v to vii		Rs.237,84,09,218/-
2015-16	Royalty refund	Ground Nos. viii to xi	Chanda unit, Maharashtra Package Scheme of Incentives, 2007	Rs.31,18,38,263/-

217. For A.Y. 2015-16, paragraph 12.2 of the CIT(A)’s order narrates the Bargarh incentive as Rs.2,81,00,000/-, whereas the unit-wise computation in paragraph 12.4 records it as a negative figure. The aggregate of Rs.237,84,09,218/- reconciles only when the Bargarh figure is taken at (-) Rs.2,81,00,000/-.

218. The learned AR supported the orders of the CIT(A) and submitted thatthe issue was squarely covered by the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023 and therefore the corresponding grounds raised by the Revenue deserved to be dismissed.

219. In case of treatment of sales-tax incentive as capital receipt, we have considered the rival submissions and perused the material placed on record. The controversy is whether the sales-tax incentives received or receivable by the assessee under the industrial policies of different State Governments constitute capital receipts or operational subsidies chargeable to tax under the normal provisions.

220. The settled principle is that the character of a subsidy is determined by the purpose for which it is granted. We find that the incentives involved in the present appeals were granted under the respective State Industrial Policies for encouraging substantial capital investment, establishment of new industrial units and expansion or modernisation of the existing units in the specified areas. The eligibility and the overall monetary ceilings were linked with the fixed-capital investment made by the respective units. The incentives were, therefore, not granted merely to meet recurring business expenditure or to supplement the assessee’s trading receipts.

221. The AO treated the incentives as revenue receipts principally because they became available after commencement of production and were quantified by reference to the sales tax or VAT paid by the respective units. In our considered view, this approach gives predominance to the mechanism of disbursement while overlooking the dominant purpose of the schemes. The fact that the benefit was quantified with reference to sales tax or VAT, or that it was received after commencement of production, does not convert an incentive granted for industrial investment and expansion into an operational subsidy.

222. We further find that an identical issue was considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 201314 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023. In paragraphs 9 to 13, the Co-ordinate Bench followed the order for A.Y. 2012-13.The Co-ordinate Bench also records that the issue had consistently been decided in favour of the assessee in the earlier assessment years. The Revenue has not brought before us any material changes in the terms of the industrial policies or in the relevant facts for the years under consideration. On the contrary, the incentives pertain to the same industrial units and substantially the same schemes considered in the earlier years. The principle of consistency, therefore, squarely applies.

223. We have also considered the insertion of clause (xviii) in section 2(24) by the Finance Act, 2015. The amendment, which brings specified Government assistance within the definition of income, takes effect from 01.04.2016 and applies from A.Y. 201617 onwards. It consequently does not govern A.Ys. 2014-15 and 2015-16 presently under consideration. (CBDT Circular No.19 of 2015, paragraph 5.3)

224. Accordingly, we uphold the findings of the CIT(A) treating the sales-tax incentives of Rs.143,03,11,576/- for A.Y. 2014-15 and Rs.237,84,09,218/- for A.Y. 2015-16 as capital receipts not chargeable to tax under the normal provisions. Ground No. iii raised by the Revenue for A.Y. 2014-15 and Ground Nos. v to vii raised for A.Y. 2015-16 are dismissed.

225. In case of treatment of royalty refund as capital receipt, we have examined the findings of the lower authorities. The royalty refunds of Rs.26,45,44,672/- for A.Y. 2014-15 and Rs.31,18,38,263/- for A.Y. 2015-16 were received from the Government of Maharashtra in respect of the assessee’s Chanda unit under the Package Scheme of Incentives, 2007.

226. The AO treated the refund as a revenue receipt on the ground that royalty constituted a trading expenditure and its refund represented remission of such expenditure. The AO also specifically proceeded on the basis that the royalty refund was not different in nature from the sales-tax incentives. The CIT(A), however, held that the refund was one of the forms in which the incentive under the Maharashtra Industrial Policy was granted and that its character had to be determined by applying the purpose test.

227. In our considered view, the nature of the outgoing in respect of which an incentive is quantified cannot, by itself, determine the character of the incentive received. The relevant enquiry is the object for which the Government granted the benefit. Merely because the incentive was calculated with reference to the royalty paid on minerals, it cannot be treated as remission of an ordinary trading liability when the benefit itself arose under an industrial incentive scheme intended to encourage capital investment and expansion. The method of quantification does not override the object and purpose of the scheme.

228. We further find that the identical issue concerning refund of royalty received from the Government of Maharashtra in respect of the same Chanda plant was considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. The issue was discussed in paragraphs 14 to 20 of the order. The Co-ordinate Bench noticed that the AO himself had treated the royalty refund as similar to the sales-tax incentive. After holding that the sales-tax incentives were capital receipts, the Co-ordinate Bench concluded that the addition on account of royalty refund could not be sustained.

229. The material facts for the years under consideration are the same. The refund arises from the same Maharashtra Industrial Policy, relates to the same Chanda plant and was treated by the AO as similar in nature to the sales-tax incentives. No distinguishing feature or subsequent contrary binding decision has been brought to our notice.

230. We, therefore, uphold the orders of the CIT(A) treating the royalty refunds of Rs.26,45,44,672/- for A.Y. 2014-15 and Rs.31,18,38,263/- for A.Y. 2015-16 as capital receipts not chargeable to tax under the normal provisions. Ground Nos. iv to vii raised by the Revenue for A.Y. 2014-15 and Ground Nos. viii to xi raised for A.Y. 2015-16 are dismissed.

Sr. No.11 – Deduction under section 32AC in respect ofcapital work-in-progress capitalised during the year

231. The common controversy arises from the assessee’s claim for investment allowance under section 32AC in respect of plant and machinery which formed part of the opening capital work-inprogress and was subsequently capitalised, installed and put to use during the relevant previous year. The dispute arises only in A.Ys. 2014-15 and 2015-16.

232. Year specific particulars are :

Particulars	A.Y. 2014-15	A.Y. 2015-16
Revenue’s ground	Ground No. xxiv	Ground No. xxii
Total plant and machinery capitalised during the year	Rs.320,10,17,640/-	Rs.329,73,52,927/-
Opening capital work-in-progress	Capital work-inprogress as on 31.03.2013	Capital work-in-progress brought forward from A.Y. 2014-15
Relevant year of installation and putting to use	F.Y. 2013-14	F.Y. 2014-15
Deduction disputed by the AO	Rs.51,31,52,646/-	Rs.49,46,02,939/-

233. The assessee, being engaged in the business of manufacture or production, had capitalised substantial amounts of plant and machinery during the relevant years. A portion of the components forming part of such plant and machinery had been procured or incurred in the earlier years and was reflected as capital work-inprogress at the beginning of the respective previous years. Upon completion of assembly, installation and commissioning, the capital work-in-progress was transferred to the plant and machinery account and the assets were put to use. The assessee claimed deduction under section 32AC on the cost of such plant and machinery.

234. Before the AO, the assessee submitted that section 32AC uses the composite expression “acquires and installs”. According to the assessee, the acquisition of a functional plant or machinery is completed only when the various components lying in capital work-in-progress are assembled, capitalised and installed. Until that stage, the individual components do not constitute an identifiable and operational plant or machinery. It was, therefore, contended that the assets transferred from capital work-inprogress and installed during the prescribed period qualified as new assets under section 32AC, even though some of their components had been procured before the commencement of that period. The assessee also drew support from the similar expression “acquired and installed” appearing in section 32(1)(iia).

235. The AO did not accept the explanation. According to the AO, section 32AC required both acquisition and installation of the new plant or machinery to take place within the statutorily prescribed period. The AO was of the view that the components forming part of the opening capital work-in-progress had been acquired before the commencement of the relevant period and, therefore, did not satisfy the conditions of section 32AC merely because they were subsequently capitalised and installed. The AO further observed that the assessee had not furnished a satisfactory bifurcation between the opening capital work-inprogress and the plant and machinery acquired and installed during the relevant previous year. Consequently, the AO disallowed the claims of Rs.51,31,52,646/- for A.Y. 2014-15 and Rs.49,46,02,939/- for A.Y. 2015-16.

236. For A.Y. 2014-15, the CIT(A) considered the issue in paragraphs 21 to 21.3 of the appellate order. The CIT(A) noted that plant and machinery amounting to Rs.320,10,17,640/- was capitalised during the year. This included plant and machinery forming part of capital work-in-progress as on 31.03.2013, which was subsequently installed and put to use during F.Y. 2013-14. The CIT(A) accepted the assessee’s contention that the acquisition of plant or machinery was completed when the assets were transferred from capital work-in-progress to the plant and machinery account and were installed and put to use.

237. The CIT(A) also compared the expression “acquired and installed” appearing in sections 32(1)(iia) and 32AC and relied upon the decision of the Bangalore Bench of the Tribunal in Bosch Ltd. v. Commissioner of Income-tax, LTU 197 ITD 160 (Bangalore – Trib.). The relevant observation reproduced in the appellate order reads as under:

“Since the wordings used in section 32(1)(iia) and 32AC are similar whether the ratio of decisions rendered in the context of 32(1)(iia) is applicable for 32AC is a debatable issue where contrary views can be taken.” (para 10 of reproduced decision)

238. The CIT(A) observed that additional depreciation under section 32(1)(iia) had also been allowed to the assessee in respect of assets forming part of the capital work-in-progress and subsequently installed and put to use. The CIT(A), therefore, held that the assessee was eligible for deduction under section 32AC in respect of the assets acquired prior to 01.04.2013 but installed and put to use during F.Y. 2013-14. The disallowance of Rs.51,31,52,646/- was accordingly deleted.

239. For A.Y. 2015-16, the AO dealt with the issue in paragraph 16 of the assessment order. During that year, the assessee capitalised plant and machinery amounting to Rs.329,73,52,927/-. The claim under section 32AC included assets forming part of the capital work-in-progress brought forward from A.Y. 2014-15 and capitalised during F.Y. 2014-15. The AO held that plant and machinery not acquired within the prescribed period did not qualify for deduction. Since, according to the AO, the assessee had also failed to furnish a proper bifurcation of the brought-forward capital work-in-progress and the plant and machinery acquired and installed during the year, he disallowed the entire claim of Rs.49,46,02,939/-.

240. The CIT(A) considered the issue for A.Y. 2015-16 in paragraphs 24 to 24.4 of the appellate order. The CIT(A) observed that the facts were similar to those prevailing in A.Y. 2014-15. He further recorded that the plant and machinery forming part of the opening capital work-in-progress was installed and put to use during F.Y. 2014-15 and that additional depreciation under section 32(1)(iia) had been allowed on the eligible assets. Following the appellate order for A.Y. 2014-15, the CIT(A) held that the assessee was entitled to deduction under section 32AC of Rs.49,46,02,939/- and deleted the disallowance.

241. The learned AR submitted that the Assessing Officer had denied the deduction under section 32AC by mechanically reading the expression “acquired and installed” and by proceeding on the basis that certain components forming part of the opening capital work-in-progress had been acquired in an earlier year. It was submitted that the relevant plant and machinery, as an integrated asset, came into existence and was capitalised only upon its installation during the respective previous year. Therefore, the date on which individual components were purchased could not determine the assessee’s eligibility under section 32AC.

242. In support, the learned AR relied upon the decision of the Co-ordinate Bench in UltraTech Cement Ltd. v. Dy. CIT [2022] (Mumbai – Trib.), order dated 14.12.2021, and invited our attention particularly to paragraph 243. In that paragraph, the Co-ordinate Bench reproduced the decision of the Hon’ble Gujarat High Court in Pr. CIT, Vadodara-2 v. IDMC Ltd. [2017] (Gujarat), wherein it was held thatthe provisions of section 32(1)(iia) are required to be interpreted reasonably and purposively. The related paras are reproduced below:

“243. The Hon’ble Gujarat High Court in the case of Pr. CIT v. IDMC Ltd. also took a similar view on the issue and has observed as under:

“Applying law laid down by the Supreme Court in various decisions to the facts of the case on hand, if the submission on behalf of the revenue is accepted, it will lead to an absurd and unjust result and the purpose and object of granting the additional depreciation will be frustrated. If the contention on behalf of the revenue is accepted, in that case, the assessee shall never get the additional depreciation as provided under section 32(1)(iia). In the facts and circumstances of the case, the twin conditions of the acquired and installed shall never be satisfied in a year and therefore, the assessee shall never get any depreciation. The purpose and object of granting additional depreciation under section 32(1)(iia) is to encourage the industries by permitting the assessee setting up the new undertaking/installation of new plant and machinery and to give a boost to the manufacturing sector by allowing additional depreciation deduction. Thus, as rightly held by the Tribunal the provisions of section 32(1)(iia) are required to be interpreted reasonably and purposively as the strict and literal reading of section 32(1)(iia) would lead toan absurd result denying the additional depreciation to the assessee though admittedly the assessee has installed new plant and machinery. Under the circumstances, no error has been committed by the Tribunal in allowing the additional depreciation at the rate of 20 per cent on the plant and machinery installed by the assessee after 31-3-2005 i.e. the year under consideration.”

244. As can be noted, the Hon’ble Gujarat High Court and the Hon’ble Bench of Coordinate Bench of this Tribunal have consistently taken a view that the twin condition of “acquired and installed” have to be read in the manner to give it a meaningful, reasonable and purposive interpretation. The twin condition can be said to have been satisfied on the day these huge plant and machineries are installed and become useful for production. Since, the language of section 32AC is similar to the language used in section 32(1)(iia), the ratio laid down in the above cases squarely applies to the facts of the instant case in the context of section 32AC.”

243. The learned AR submitted that the Hon’ble High Court had rejected a strict and literal interpretation of the expression “acquired and installed”, since such an interpretation would produce an absurd result and frustrate the object of granting an investment incentive.

244. The learned AR, therefore, submitted that the facts of the present appeals were squarely covered by the aforesaid decision. The assets under consideration were capitalised only after their installation during the respective years, and the assessee’s claim could not be rejected merely because some of their components had been procured in an earlier period and were reflected as capital work-in-progress. The orders of the CIT(A) allowing the deduction were, therefore, submitted to be in accordance with the governing judicial precedent.

245. The learned DR, per contra, relied upon the decision of the Chennai Bench of the Tribunal in Hyundai Motor India Ltd. v. ACIT [IT(TP) Appeal No. 70 (Chny) of 2018, dated 16-3-2022]. It was submitted that the controversy considered therein was identical. In that case also, certain machinery forming part of the capital work-in-progress had been acquired before 01.04.2013, although the integrated plant was installed during the prescribed period.

246. Inviting our attention to paragraphs 11.9 to 11.12 of the said decision, the learned DR submitted that the Chennai Bench construed the expression “acquired and installed” appearing in section 32AC as prescribing two cumulative conditions. In paragraph 11.10, the Co-ordinate Bench held as under:

“Therefore, we are of the considered view that in order to eligible for benefit of investment allowance u/s.32AC(1) of the Act, the assessee must satisfy two conditions as per which new asset should be acquired and installed between 01.04.2013 and 31.03.2015. Unless the assessee satisfies two conditions, it cannot claim benefit of additional investment allowance.”

247. The learned DR further referred to paragraph 11.11, wherein the Tribunal rejected the contention that the completion and installation of an integrated plant during the prescribed period was sufficient, notwithstanding that some of its constituent machinery had been acquired earlier. The relevant finding reads as under:

“Therefore, even if, the assessee acquires certain plant and machinery which are used in plant meant for manufacturing of certain engines and completed during the financial year relevant to the assessment year 2014-15, we are of the considered view that unless the assessee satisfies conditions prescribed therein, it cannot claim benefit of investment allowance.”

248. The Chennai Bench also distinguished decisions rendered in the context of additional depreciation under section 32(1)(iia), observing that depreciation under section 32 and investment allowance under section 32AC operated in different statutory fields. Ultimately, in paragraph 11.12, the Tribunal upheld the disallowance of investment allowance in respect of plant and machinery acquired and reflected as capital work-in-progress before 01.04.2013.

249. Relying upon the aforesaid ratio, the learned DR submitted that installation or capitalisation of the plant during the relevant previous year would not cure the failure to satisfy the independent condition of acquisition within the period prescribed under section 32AC. He, therefore, contended that the CIT(A) was not justified in allowing the deduction merely because the machinery forming part of the opening capital work-in-progress was installed and capitalised during the relevant year. Accordingly, the learned DR prayed that the orders of the CIT(A) on this issue be reversed and the disallowances made by the Assessing Officer be restored.

250. In rebuttal, the learned AR submitted that the decision of the Chennai Bench in Hyundai Motor India Ltd. (supra),did not consider the earlier decision of the Mumbai Bench in UltraTech Cement Ltd. (supra). It was submitted that although the Chennai Bench referred to the decision in IDMC Ltd. (supra), it did not have the benefit of the detailed reasoning subsequently recorded on the applicability of that decision to section 32AC in paragraphs 243 to 249 of UltraTech Cement Ltd. (supra).

251. The learned AR pointed out that the Mumbai Bench, after considering the decision of the Hon’ble Gujarat High Court, specifically held in paragraph 244 as under:

“Since, the language of section 32AC is similar to the language used in section 32(1)(iia), the ratio laid down in the above cases squarely applies to the facts of the instant case in the context of section 32AC.”

252. It was submitted that the Mumbai Bench thereafter adopted a purposive interpretation of the expression “acquired and installed” and concluded in paragraph 247 as under:

“We are, therefore, inclined to accept the contention of the AR of the assessee that the words ‘acquired and installed’ have to be read as ‘acquired or installed’ to give effect to the intention of the legislature.”

253. The learned AR further invited our attention to the operative conclusion in paragraph 249, wherein the Co-ordinate Bench held:

“In view of the above we have no hesitation to hold that the assessee is entitled to deduction u/s 32AC of the Act on the value of cost of components of plant or machinery lying as CWIP as on 1 April 2013 but installed during the financial year 2013-14.”

254. The learned AR thus submitted that UltraTech Cement Ltd. directly considered the eligibility of components lying in capital work-in-progress under section 32AC and decided the identical controversy in favour of the assessee after applying the ratio of the Hon’ble Gujarat High Court. Therefore, the said decision constituted a more direct precedent on the issue under consideration.

255. The learned AR alternatively submitted that the decisions of the Mumbai Bench in UltraTech Cement Ltd. and the Chennai Bench in Hyundai Motor India Ltd. represented two different views on the interpretation of the same statutory expression. Where two reasonable constructions of a taxing provision are possible, the construction favourable to the assessee is required to be adopted.

256. Accordingly, the learned AR submitted that the view adopted in UltraTech Cement Ltd., being favourable to the assessee and also consistent with the purposive interpretation placed by the Hon’ble Gujarat High Court upon the expression “acquired and installed”, deserved to be followed. He, therefore, contended that the decision in Hyundai Motor India Ltd.did not warrant interference with the relief granted by the CIT(A).

257. We have considered the rival submissions and perused the material placed on record. The limited controversy is whether the assessee is entitled to deduction under section 32AC in respect of the cost of components reflected as capital work-in-progress at the beginning of the relevant previous year, when the integrated plant and machinery comprising such components was completed, installed and capitalised during the relevant previous year.

258. The Revenue has relied upon the decision of the Chennai Bench in Hyundai Motor India Ltd. (supra). The Chennai Bench construed the conditions of acquisition and installation as cumulative and held that both must be fulfilled within the period prescribed under section 32AC. On that basis, the benefit was denied in respect of machinery acquired before the prescribed period, even though the integrated plant was installed during the qualifying period.

259. The assessee, on the other hand, has relied upon the decision of the Mumbai Bench in UltraTech Cement Ltd. (supra). In that decision, the Co-ordinate Bench considered the identical question of components lying in capital work-inprogress as on 01.04.2013 but forming part of plant and machinery installed during the financial year 2013-14. After considering the decision of the Hon’ble Gujarat High Court in IDMC Ltd. (supra), the Co-ordinate Bench held that the expression “acquired and installed” must receive a reasonable and purposive interpretation. It consequently allowed the deduction under section 32AC on the cost of components forming part of the opening capital work-in-progress.

260. We find that the decision in UltraTech Cement Ltd. was rendered before the decision in Hyundai Motor India Ltd. but was not brought to the notice of the Chennai Bench. Although the Chennai Bench considered IDMC Ltd. and distinguished it as having been rendered in the context of additional depreciation under section 32(1)(iia), it did not consider the specific reasoning in UltraTech Cement Ltd. that the similarity in the statutory language made the principle laid down in IDMC Ltd. applicable to section 32AC. Thus, the Chennai Bench did not examine or reject the ratio of UltraTech Cement Ltd. and the two decisions represent divergent views of Co-ordinate Benches.

261. On an independent consideration, we find the view adopted in UltraTech Cement Ltd. more appropriate to the facts before us. Section 32AC grants the deduction with reference to a “new asset”, namely new plant or machinery. In the case of a large integrated manufacturing facility, individual components cannot invariably be regarded as independent plant or machinery merely because they were purchased earlier and reflected as capital work-in-progress. The relevant enquiry is whether the integrated plant or machinery, in respect of which the deduction is claimed, came into existence and was installed during the qualifying period.

262. The mere purchase of individual components does not necessarily amount to acquisition of the integrated plant. Those components assume the character of the intended plant or machinery only after they are assembled, integrated and installed for their designated manufacturing function. Capital work-inprogress represents expenditure incurred on an asset that is yet to be completed and capitalised. Therefore, the existence of an opening capital work-in-progress balance, by itself, cannot establish that the new plant or machinery had already been acquired and installed before the prescribed period.

263. In the present case, the CIT(A) recorded that the relevant plant and machinery was installed and capitalised during the respective previous years. The Assessing Officer has not recorded any finding that the integrated plant or machinery had already been installed, capitalised or made operational before the qualifying period. The deduction was denied merely because some of the constituent components were included in the opening capital work-in-progress. Such a basis is insufficient to deny the deduction under section 32AC.

264. We also note that section 32AC was introduced as an investment incentive to encourage substantial investment in new plant and machinery. The provision must be construed in a manner that advances its legislative object. A construction that permanently excludes the cost of components procured during the course of setting up a large project merely because their procurement commenced before the prescribed date, even though the integrated plant itself was completed and installed within the qualifying period, would defeat the object of the provision.

265. Further, in the absence of any decision of the jurisdictional High Court directly governing the issue, two reasonable views of Co-ordinate Benches are available. Applying the settled principle that, where two reasonable constructions of a taxing provision are possible, the construction favourable to the assessee should be adopted, we respectfully follow the view taken by the Mumbai Bench in UltraTech Cement Ltd.

266. Accordingly, we find no infirmity in the orders of the CIT(A) allowing the deduction under section 32AC in respect of the components forming part of the opening capital work-in-progress but comprising the plant and machinery installed and capitalised during the respective previous years. Ground No. xxiv of the Revenue’s appeal for A.Y. 2014-15 and Ground No. xxii of its appeal for A.Y. 2015-16 are, therefore, dismissed.

Sr. 12 – Exclusion of sales tax incentive, excise duty exemption and royalty refund while computing book profit under section 115JB

267. We will now separately examine whether these receipts, even if capital in nature, can be excluded from the net profit shown in the statement of profit and loss while computing book profit under section 115JB, having regard to the limited adjustments permitted under Explanation 1 thereto.

268. The year-specific particulars relating to exclusion of sales-tax incentive, excise-duty exemption and royalty refund while computing book profit under section 115JB are as follows:

Particulars	A.Y. 2014-15	A.Y. 2015-16
Revenue’s ground	Ground No. xxv	Ground No. xxiii
Sales-tax incentive	Rs.143,03,11,576/-	Rs.237,84,09,218/-
Excise-duty exemption	Rs.261,19,80,837/-	Rs.267,10,28,547/-
Royalty refund	Rs.26,45,44,672/-	Rs.31,18,38,263/-
Aggregate amount claimed for exclusion	Rs.430,68,37,085/-	Rs.536,12,76,028/-

269. During the assessment proceedings, the AO noticed that the assessee had claimed exclusion of the sales-tax incentive, exciseduty exemption benefit and royalty refund while computing book profit under section 115JB. The assessee was called upon to explain why the aforesaid amounts should not be included in the book profit.

270. The assessee submitted that all three receipts were capital in nature and did not contain any element of income or profit. It was explained that the incentives were granted to compensate for the increased capital cost incurred in setting up new units or expanding the existing units situated in backward or underdeveloped areas. The assessee, therefore, contended that the capital receipts did not enter into the computation of book profit under section 115JB.

271. The AO did not accept the explanation. Relying upon the decisions in Malayala Manorama Co. Ltd. v. CIT, Trivandrum [2008] 216 CTR 102/300 ITR 251 (SC) andApollo Tyres Ltd. v. CIT [2002] 174 CTR 521/255 ITR 273 (SC), the AO held that the computation under section 115JB had to be made with reference to the net profit shown in the statement of profit and loss, subject only to the adjustments specifically enumerated in Explanation 1. According to the AO, the exclusion of sales-tax incentive, excise-duty exemption or royalty refund was not expressly provided in Explanation 1 to section 115JB. The AO accordingly included the aggregate amount of Rs.430,68,37,085/- for A.Y. 2014-15 and Rs.536,12,76,028/- for A.Y. 2015-16 while computing book profit.

272. Before the CIT(A), the assessee reiterated that the impugned receipts were capital receipts granted for setting up or expanding industrial units and, therefore, did not represent income or profit capable of being subjected to MAT. The assessee relied upon CBDT Circular No.495 dated 22.09.1987, the decisions referred to in its written submissions, the orders passed in its own case for the earlier assessment years and the decision in the case of its group company, Ambuja Cements Ltd.

273. For A.Y. 2014-15, the CIT(A), in paragraph 24.2, observed that the Co-ordinate Bench, in the assessee’s own case for A.Y. 2013-14, had followed the earlier order for A.Y. 2006-07 and dismissed the Revenue’s ground concerning the inclusion of sales-tax incentive, excise-duty exemption and royalty refund while computing book profit under section 115JB. Finding no change in the material facts, the CIT(A) followed the decision for A.Y. 2013-14 and allowed Ground No.19.

274. The concluding sentence of paragraph 24.2 directs the AO “not to add the provision for leave encashment” while computing book profit. This is evidently a clerical carry-forward error. The entire discussion in paragraphs 24 to 24.2 concerns sales-tax incentive, excise-duty exemption and royalty refund. The allowance of Ground No.19 consequently represents a direction to exclude these three receipts while computing book profit under section 115JB.

275. For A.Y. 2015-16, the CIT(A), in paragraphs 26 to 26.2, found that the issue arose on the same facts as in A.Ys. 2013-14 and 2014-15. The CIT(A) noted that the Co-ordinate Bench had decided the issue in favour of the assessee for A.Y. 2013-14 and that the same view had been followed by the CIT(A) for A.Y. 2014-15. In the absence of any change in the material facts, the CIT(A) directed the AO not to include the impugned amounts aggregating to Rs.536,12,76,028/- while computing book profit under section 115JB and allowed Ground No.18.

276. Before us the AR placed reliance on the orders of CIT(A) and decision of Co-ordinate Bench in its own case for the A.Y. 2013-14.

277. We have considered the rival submissions and perused the material placed on record. The issue before us is whether the sales-tax incentive, excise-duty exemption and royalty refund, having been held to be capital receipts, can nevertheless be included in the computation of book profit under section 115JB merely because they have been credited to the statement of profit and loss.

278. The learned AR relied upon the orders of the CIT(A) and submitted that the issue stood covered by the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023.

279. At this stage, we clarify that the relevant discussion in the order for A.Y. 2013-14 appears at pages 162 to 168 of the order, whereas the corresponding numbered paragraphs are paragraphs 119 to 123. In paragraph 119, the Co-ordinate Bench recorded the Revenue’s ground challenging the exclusion of sales-tax incentive of Rs.99,17,41,517/-, excise-duty exemption of Rs.254,44,56,144/- and royalty refund of Rs.25,17,62,233/-while computing book profit under section 115JB.

280. In paragraphs 120 to 123, the Co-ordinate Bench considered the rival submissions and followed the earlier decision in the assessee’s own case for A.Y. 2006-07 in ITA No.5655/Mum/2011, order dated 28.02.2023. The earlier order had, in turn, followed the decision in the case of Ambuja Cements Ltd. and applied the purpose test recognised by the Hon’ble jurisdictional High Court in Pr. CIT, Central-2 v. Welspun Steel Ltd. (Bombay). The ratio of these decisions is that the character of an incentive is determined by the object and purpose for which it is granted and not by its nomenclature, the stage at which it is received or the mechanism adopted for quantifying the benefit.

281. The Co-ordinate Bench found that the sales-tax and exciseduty incentives were granted for promoting industrial investment, setting up new industrial units and undertaking substantial expansion in backward areas. The fact that the incentives became available after commencement of production or were quantified with reference to the tax otherwise payable did not alter their capital character. The royalty refund, being another form of benefit granted under the industrial incentive scheme, was governed by the same principle.

282. After determining the true character of these receipts, the Co-ordinate Bench held that the excise-duty exemption and the related incentives constituted capital receipts both under the normal provisions and while computing book profit under section 115JB. Following the principle of consistency, the Revenue’s corresponding ground for A.Y. 2013-14 was dismissed in paragraph 123.

283. The distinction sought to be drawn by the AO on the basis of Apollo Tyres Ltd. (supra)and Malayala Manorama Co. Ltd. (supra) does not assist the Revenue in the facts of the present case. Those decisions restrict the power of the AO to recast the accounts or make adjustments to the net profit beyond those contemplated by section 115JB. The present issue, however, concerns the anterior question whether a receipt which is capital in nature and does not possess the character of income or profit can form part of “book profit” for the purpose of levying tax under section 115JB. The Co-ordinate Bench has answered this precise issue in favour of the assessee in the earlier assessment year.

284. The character of the receipts and the industrial schemes under which they arose remain unchanged in the years before us. The sales-tax incentive, excise-duty exemption and royalty refund relate to the same industrial units and substantially the same schemes considered in the earlier years. No distinguishing feature, change in the governing statutory provisions or contrary binding decision has been brought to our notice.

285. We, therefore, respectfully follow the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 and uphold the orders of the CIT(A) directing exclusion of the impugned capital receipts while computing book profit under section 115JB. Consequently, Ground No. xxv raised by the Revenue for A.Y. 2014-15 and Ground No. xxiii raised for A.Y. 2015-16 are dismissed.

286. We shall now deal with the remaining year-specific grounds separately on by one, beginning with A.Y. 2014-15.

I. Deduction under section 80-IA in respect of TG-3 Power Plant (Grounds xi and xii of Revenue’s Appeal)

287. For A.Y. 2014-15, the assessee claimed deduction under section 80-IA aggregating to Rs.288,46,27,241/- in respect of 15 power-generating undertakings. The aggregate claim included deduction of Rs.12,77,18,536/- in respect of the TG-3 Power Plant situated at Wadi, Karnataka.

288. During the assessment proceedings, the AO called upon the assessee to demonstrate that the conditions prescribed under section 80-IA were satisfied in respect of TG-3. The assessee submitted that the undertaking fulfilled all the statutory conditions and was eligible for the deduction. The AO, however, observed that the deduction in respect of TG-3 had been disallowed in the earlier assessment years. Finding no change in the facts, the AO followed the reasoning adopted in the preceding years and disallowed the deduction.

289. Before the CIT(A), the assessee submitted that the restrictions contained in section 80-IA(3) were not attracted. TG-3 had been constructed by Tata Power Company Ltd. and was subsequently purchased by the assessee as an entire running undertaking on a slump-sale basis. The assessee had not acquired isolated items of previously used plant and machinery for forming a new undertaking. It had acquired the powergenerating undertaking as a whole and continued its operations.

290. The assessee contended that the acquisition of an entire undertaking from an independent entity did not amount to the formation of an undertaking by splitting up or reconstruction of the assessee’s existing business. It was further submitted that the tax holiday under section 80-IA attaches to the eligible undertaking and not to its owner. Consequently, a change in ownership of the undertaking would not extinguish the benefit for the unexpired eligible period.

291. The assessee also relied upon CBDT Letter F. No.15/5/63-IT(A-I) dated 13.12.1963, which recognises that the benefit of a tax holiday attaches to the undertaking and that a successor acquiring the undertaking as a running concern is entitled to the benefit for the unexpired period. Reliance was also placed upon the orders passed in the assessee’s own case for the earlier assessment years, including the decision of the Co-ordinate Bench for A.Y. 2013-14.

292. The CIT(A) found that the identical issue had been decided in favour of the assessee for A.Y. 2013-14. The CIT(A) further noticed that the deduction in respect of TG-3 had been allowed by the first appellate authority from A.Y. 2005-06 onwards. Following the decision of the Co-ordinate Bench for A.Y. 2013-14, the CIT(A) directed the AO to allow deduction of Rs.12,77,18,536/- under section 80-IA in respect of the TG-3 Power Plant.

293. The AR reiterated the findings of CIT(A) and placed reliance on the decision of Co-ordinate Bench.

294. We have considered the rival submissions and perused the material placed on record. Ground Nos. xi and xii raised by the Revenue challenge the allowance of deduction under section 80-IA in respect of the TG-3 Power Plant. The Revenue contends that the undertaking was purchased from Tata Power Company Ltd. and was consequently hit by the prohibition contained in section 80-IA(3)(ii). The Revenue has also contended that no deduction had been claimed in respect of the undertaking on an earlier occasion.

295. We find that the identical issue was considered by the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos.800 and 1171/Mum/2022, order dated 30.06.2023. In paragraphs 73 to 76, the Co-ordinate Bench noticed that the same issue had already been adjudicated in the assessee’s own case for A.Y. 2005-06 in ITA No.3786/Mum/2009, order dated 28.02.2023. In that decision, the Bench examined the restrictions contained in section 80-IA(3) and held that the acquisition of an entire running undertaking is materially different from forming a new undertaking by transferring individual items of previously used plant and machinery to a new business.

296. The Bench applied the principle that reconstruction presupposes the continued existence of the original business with substantially the same identity. A mere change in the ownership of an existing undertaking does not amount to reconstruction. Similarly, where the entire undertaking is transferred as a going concern, the successor’s undertaking cannot be regarded as one formed by splitting up the successor’s existing business. In reaching this conclusion, the Bench applied the principles laid down in CIT v. Gaekwar Foam and Rubber Co. Ltd. [1959] 35 ITR 662 (Bombay), as approved by the Hon’ble Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC), andCIT, City-VII, Mumbai v. Sonata Software Ltd. [2012] (Bombay).

297. The Co-ordinate Bench also recognised the distinction between eligibility of the undertaking and ownership of the undertaking. The deduction under section 80-IA is qua the eligible undertaking. The transfer of such undertaking as a running concern does not destroy its identity or bring the tax holiday to an end. The successor is entitled to claim the deduction for the balance eligible period, subject to compliance with the remaining statutory conditions. This principle was supported by CBDT Letter dated 13.12.1963 and the judicial precedents discussed in the earlier order.

298. The factual premise of Ground No. xi also requires clarification. The record shows that TG-3 was constructed by Tata Power Company Ltd. and thereafter purchased by the assessee as a running undertaking. It was not an undertaking earlier owned by the assessee and subsequently repurchased by it. The aspect of repurchase related to TG-2 and not TG-3. Therefore, the description of TG-3 as a “re-purchased” undertaking does not accord with the factual findings recorded in the appellate orders for the earlier years.

299. The mere fact that Tata Power Company Ltd. had not claimed deduction under section 80-IA does not establish that the undertaking was ineligible. Eligibility of an undertaking cannot be negatived merely because its previous owner did not avail the deduction. The Revenue has not brought on record any material demonstrating that TG-3 failed to satisfy any substantive condition of section 80-IA or that the eligible period had expired.

300. In A.Y. 2013-14, the Co-ordinate Bench followed its decision for A.Y. 2005-06 and dismissed the Revenue’s ground concerning TG-3. Thus, the eligibility of the same undertaking has already been adjudicated in favour of the assessee. No material change in the facts or the governing statutory provisions for A.Y. 2014-15 has been demonstrated before us. The AO also made the disallowance merely by following the assessment orders for the earlier years without recording any fresh adverse finding.

301. A claim allowed in respect of an undertaking in the initial or earlier years cannot ordinarily be denied in a subsequent year without first disturbing the finding concerning its eligibility or demonstrating a material change in the relevant facts. Since the Revenue has not brought any such material on record, the principle of consistency squarely applies.

302. We, therefore, respectfully follow the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 and find no infirmity in the order of the CIT(A) allowing deduction of Rs.12,77,18,536/- under section 80-IA in respect of the TG-3 Power Plant at Wadi. Accordingly, Ground Nos. xi and xii raised by the Revenue for A.Y. 2014-15 are dismissed.

II.Tax paid on non-monetary perquisites while computing book profit under section 115JB (Revenue’s Ground xxvii)

303. This issue concerns the addition of tax paid by the assessee on non-monetary perquisites while computing book profit under section 115JB. The AO observed that the assessee had paid tax of Rs.34,12,177/- on non-monetary perquisites provided to its employees. The assessee had disallowed the said amount under section 40(a)(v) while computing its income under the normal provisions. According to the AO, since the tax paid on such perquisites was exempt in the hands of the employees under section 10(10CC), it could not be regarded as being akin to tax deducted at source or Fringe Benefit Tax. The AO, therefore, treated the amount as income-tax within the meaning of clause (a) of Explanation 1 to section 115JB and added Rs.34,12,177/-while computing the book profit.

304. Before the CIT(A), the assessee contended that the AO had disregarded its submissions and had incorrectly added the tax paid on non-monetary perquisites to the book profit. The assessee relied upon the decision of the Co-ordinate Bench in its own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023.

305. The CIT(A) noted that the Co-ordinate Bench had decided the identical issue in favour of the assessee for A.Y. 2013-14 after considering the decisions in Rashtriya Chemicals & Fertilizers Ltd. v. Commissioner of Income-tax, LTU, Mumbai [2018] (Mumbai),IDBI Bank Ltd. v. DCIT [IT Appeal Nos. 3394 and 3849 (Mum) of 2019], DCIT v. NHPC Ltd. [IT Appeal Nos. 2786 and 3121 (Del) of 2016, dated 20-3-2020]. Finding no change in the material facts, the CIT(A) followed the order for A.Y. 2013-14 and directed the AO not to add Rs.34,12,177/- while computing book profit under section 115JB.

306. We have considered the rival submissions and perused the material placed on record. The learned AR supported the order of the CIT(A) and placed reliance upon the findings recorded in the impugned order and the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14.

307. We find that the Co-ordinate Bench considered the identical controversy and first clarified that the disallowability of the amount under section 40(a)(v) while computing income under the normal provisions was not in dispute. The only question was whether the same amount could also be added while computing book profit under Explanation 1 to section 115JB.

308. While following IDBI Bank Ltd. (supra), the Coordinate Bench reproduced the following relevant ratio in paragraph 54:

“the taxes borne by the assessee on non-monetary perquisites provided to employees forms part of Employee Benefit cost and akin to Fringe Benefit Tax since they are certainly not ‘below the line’ items since the same are expressively disallowed under section 40(a)(v), the same do not constitute Income Tax for the assessee in terms of Explanation-2. Therefore, without there being any corresponding amendment in the definition of Income Tax as provided in Explanation-2 to Section 115JB, Fringe Benefit Tax was not required to be added back while arriving at Book Profits u/s. 115JB.”

309. Thereafter, upon considering the decisions in Rashtriya Chemicals & Fertilizers Ltd. (supra) andNHPC Ltd. (supra), the Co-ordinate Bench concluded in paragraph 56 as under:

“It is observed that on identical issue, the coordinate bench as well as Delhi ITAT has deleted the adjustment made on account of tax paid on non-monetary perquisites provided to the employees to book profit u/s 115JB of the Act. Respectfully following the decisions as discussed herein above, this ground raised by assessee is allowed.”

310. The computation of book profit under section 115JB is governed by the profit disclosed in the statement of profit and loss, subject only to the adjustments specifically enumerated in Explanation 1. A disallowance made under the normal provisions cannot automatically be imported into the computation under section 115JB unless it falls within one of the prescribed adjustments.

311. The tax in question was borne by the assessee in respect of non-monetary perquisites provided to its employees. It represented an employee benefit cost and was not income-tax paid or payable on the income of the assessee. The fact that the expenditure was not deductible under section 40(a)(v) does not bring it within clause (a) of Explanation 1 to section 115JB. The consequences under section 40(a)(v) and section 115JB operate in distinct fields.

312. The issue is thus squarely covered by the decision of the Coordinate Bench in the assessee’s own case for the immediately preceding assessment year. No change in the material facts or applicable statutory provisions has been brought to our notice. We, therefore, find no infirmity in the decision of the CIT(A) directing the AO to exclude Rs.34,12,177/- from the computation of book profit under section 115JB. Accordingly, Revenue’s Ground No. xxvii is dismissed.

A.Y. 2015-16: Excise duty exemption treated as capital receipt (Revenue’s Ground No. (xii)

313. Revenue’s Ground No. xii challenges the decision of the CIT(A) holding that the excise duty exemption of Rs.267,10,28,547/- availed by the assessee constituted a capital receipt and was, therefore, not taxable under the normal provisions. The tax effect stated by the Revenue in respect of this ground is Rs.90,78,82,603/-.

314. The relevant facts, as emerging from paragraph 7.13 of the assessment order, are that the assessee had not offered the aforesaid excise-duty exemption to tax. The AO, therefore, required the assessee to explain why the receipt should not be treated as revenue in nature. In response, the assessee furnished detailed submissions dated 22.10.2018 and 11.12.2018, the relevant incentive schemes, supporting evidence and the judicial authorities relied upon in support of its claim.

315. The assessee explained that Gagal-I commenced commercial production in 1983, whereas Gagal-II commenced production in 1995. During F.Y. 2002-03, the assessee undertook substantial expansion of both units by making fresh investments. According to the assessee, the expansion resulted in an increase of more than 50% in the book value of the assets compared with the book value prevailing before the expansion and was completed during F.Y. 2005-06. Under General Exemption No. 51 issued vide Notification No. 50/2003 dated 10.06.2003, the goods manufactured by the expanded Gagal-I and Gagal-II units were exempt from the whole of the excise duty or additional excise duty otherwise leviable thereon.

316. The assessee contended before the AO that the exemption was granted only upon undertaking substantial expansion involving capital expenditure and an increase in installed capacity of not less than 25%. Its case was that the character of the incentive had to be determined by reference to the object and purpose of the scheme and not by the stage at which the benefit was received or the mechanism through which it was quantified. According to the assessee, the object of the scheme, read with the Office Memorandum dated 07.01.2003 issued by the Ministry of Commerce and Industry, was to accelerate industrial growth by encouraging the establishment and substantial expansion of industrial units in the specified backward areas of Himachal Pradesh and Uttarakhand.

317. The assessee also sought to distinguish the decision of the Hon’ble Delhi High Court in CIT v. Bhushan Steels & Strips Ltd. 299 CTR 474/398 ITR 216 (Delhi), on the ground that it concerned a sales-tax subsidy granted under a different State scheme. It was further submitted that the operation of the said decision had been stayed by the Hon’ble Supreme Court. The assessee relied upon the decisions in Shree Balaji Alloys, Chaphalkar Brothers and Mahindra Vehicles to support its contention that the eligibility of the incentive following commencement of production did not, by itself, make the receipt revenue in nature when the scheme was intended to promote capital investment and substantial expansion in backward areas. The assessee also submitted that its claim had been accepted by the CIT(A) for A.Y. 2012-13.

318. The AO did not accept the assessee’s explanation. According to him, although the scheme required the establishment of a new unit or substantial expansion of an existing unit as a condition for eligibility, it did not require the excise-duty benefit to be utilised for acquiring capital assets, repaying term loans or recouping the capital expenditure incurred on the expansion. The AO observed that the assessee was free to utilise the amount retained under the excise-duty exemption without any restriction as to its end use.

319. The AO further noticed that the incentive scheme separately provided for a capital-investment subsidy at 15% of the investment in plant and machinery, subject to a ceiling of Rs.30,00,000/-. On that basis, he concluded that the scheme itself made a distinction between the capital-investment subsidy and the excise-duty exemption. Since the latter did not carry any condition requiring utilisation towards capital expenditure, the AO treated it as an incentive intended to augment the operating profitability of the eligible units.

320. The AO also placed emphasis on the fact that the exciseduty exemption was available for ten years from the commencement of commercial production. In his view, the benefit arose only after the units had commenced production and exciseduty liability had otherwise become payable. The scheme merely permitted the assessee to retain the amount of excise duty instead of paying it to the Government. The AO, therefore, considered the exemption to be assistance for carrying on the business rather than assistance for setting up or substantially expanding the units.

321. The AO distinguished the principle relied upon by the assessee on the ground that, in cases where the subsidy had been treated as capital, the scheme required the incentive to be utilised for repayment of loans taken for setting up a new unit or for substantial expansion. In the present case, according to the AO, no corresponding obligation was attached to the exemption. He held that its purpose was revenue augmentation intended to improve the profitability and economic viability of industries operating in the specified backward areas and thereby encourage employment and utilisation of local resources.

322. The AO also relied upon the decision of the Delhi Bench of the Tribunal in Maruti Suzuki India Ltd. and the departmental stand in the assessee’s own case for A.Y. 2012-13. He noted that although the CIT(A) had allowed the assessee’s claim for that year, the Revenue had challenged the decision before the Tribunal. Since, according to him, the facts remained unchanged, the AO treated the excise-duty exemption of Rs.267,10,28,547/-as a revenue receipt and added it to the assessee’s total income.

323. Before the CIT(A), the assessee reiterated that the AO had misconstrued the scheme by treating the separate capitalinvestment subsidy as the only benefit capable of being regarded as capital in nature. The assessee submitted that capitalinvestment subsidy was merely one of the modes of granting an incentive and that the scheme did not define it as the exclusive capital incentive. The excise-duty exemption was another mode of granting assistance to units that had made the stipulated investment and undertaken substantial expansion.

324. The assessee further contended that the AO had incorrectly treated the post-production stage at which the exemption became available as decisive. According to the assessee, the relevant test was the purpose for which the scheme was introduced. The Office Memorandum dated 07.01.2003 and Notification No. 50/2003 dated 10.06.2003 demonstrated that the object was to intensify and accelerate industrial development in the specified backward areas. The commencement of production merely determined the stage at which the benefit could be quantified and did not alter the object of the scheme.

325. The assessee also relied upon the decisions in Principal Commissioner of Income-tax, Central-2 v. Welspun Steel Ltd. [2019] (Bombay), Chaphalkar Brothers, Shree Balaji Alloys and the orders of the Co-ordinate Bench in the case of its group company, Ambuja Cements Ltd. It was submitted that, in the case of Ambuja Cements Ltd., the Tribunal had considered the same General Exemption No. 51 issued through Notification No. 50/2003 dated 10.06.2003 in relation to a unit situated in Himachal Pradesh and had decided the issue in favour of that assessee.

326. It was further submitted that the assessee’s claim had consistently been accepted by the CIT(A) for A.Ys. 2008-09 to 2012-13. Subsequent to the passing of the assessment order for the year under consideration, the Co-ordinate Bench, in the assessee’s own case for A.Y. 2012-13 in ITA No. 3246/Mum/2018, vide order dated 28.02.2023, had dismissed the corresponding ground raised by the Revenue.

327. The CIT(A) observed that the AO himself had treated the facts for the year under consideration as similar to those prevailing in A.Y. 2012-13. The CIT(A) further recorded that the issue was recurring and that the Revenue’s corresponding ground for A.Y. 2012-13 had been dismissed by the Tribunal. The CIT(A) also referred to the Tribunal’s order in Ambuja Cement Ltd. in ITA Nos. 5883/Mum/2012 and 5927/Mum/2012 for A.Y. 2005-06, dated 31.10.2022, which, according to him, covered the identical issue.

328. On that basis, the CIT(A) concluded that the issue stood covered in favour of the assessee by the orders of the Tribunal in the assessee’s own case for A.Y. 2012-13 and the earlier assessment years. Respectfully following those orders, the CIT(A) directed the AO to delete the addition of Rs.267,10,28,547/- and allowed Ground No. 7 of the assessee’s appeal.

329. Before us the AR placed reliance on the impugned order of CIT(A) and the decision of Co-ordinate Bench in Assessee’s own case for the A.Y. 2012-13.

330. We have considered the rival submissions and perused the material placed on record. The controversy is whether the exciseduty exemption of Rs.267,10,28,547/- availed by the assessee in respect of its Gagal-I and Gagal-II units constitutes a capital receipt or a revenue receipt under the normal provisions of the Act.

331. The material facts relevant to the determination of the character of the receipt are not in dispute. Gagal-I commenced commercial production in 1983 and Gagal-II in 1995. During F.Y. 2002-03, the assessee undertook substantial expansion of both units by making substantial fresh investment. The expansion resulted in an increase of more than 50% in the book value of the assets compared with the value before expansion and was completed during F.Y. 2005-06. General Exemption No. 51, issued vide Notification No. 50/2003 dated 10.06.2003, granted exemption from excise duty and additional excise duty in respect of goods manufactured by eligible new industrial units and units undertaking substantial expansion in the specified areas of Himachal Pradesh and Uttarakhand.

332. The governing principle for determining the character of an incentive subsidy was explained by the Hon’ble Supreme Court in CIT, Madras v. Ponni Sugars & Chemicals Ltd. [2008] 219 CTR 105/306 ITR 392 (SC). The relevant ratio contained in paragraph 14 reads as under:

“The importance of the judgment of this Court in Sahney Steel & Press Work’s Ltd.’s case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.”

333. The ratio emerging from the aforesaid decision is that the character of an incentive cannot be determined merely by considering whether the benefit is received before or after commencement of commercial production. Its source, form and mode of quantification are also not decisive. The determinative consideration is the purpose for which the incentive has been granted. Where the object is to facilitate the establishment of a new unit or substantial expansion of an existing unit, the receipt is on capital account. Where the purpose is to meet recurring expenditure or enable the assessee to carry on its existing business more profitably, the receipt is revenue in nature.

334. The aforesaid principle was reiterated and explained by the Hon’ble Supreme Court in CIT-I, Kolhapur v. Chaphalkar Brothers Pune 0 (SC), order dated 07.12.2017. After considering Sahney Steel and Ponni Sugars, the Hon’ble Supreme Court recorded the ratio in the following terms:

“What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the „purpose test’. It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.”

335. While applying the purpose test to an incentive which became available after construction and was quantified by reference to entertainment duty, the Hon’ble Supreme Court held as under:

“The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one – there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.”

336. The aforesaid observations directly answer the AO’s reasoning that the exemption must be treated as a revenue receipt because it became available for ten years after commencement of commercial production. The Hon’ble Supreme Court has expressly held that the stage at which the incentive becomes available and the particular manner in which the object of the scheme is implemented are not determinative. Once the object is to promote the establishment or substantial expansion of capital-intensive industrial units, the fact that the benefit is granted after commencement of production does not alter its character.

337. More importantly, in Chaphalkar Brothers, the Hon’ble Supreme Court specifically examined the decision of the Hon’ble Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT (Jammu & Kashmir), which concerned refund of excise duty and interest subsidy. The relevant discussion reads as under:

“While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.

After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars, and the appeals were, therefore, dismissed.

We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.”

338. The aforesaid ratio is significant for the present controversy. It makes clear that an express condition requiring the incentive to be utilised for purchasing machinery or other capital assets is not indispensable in every case. Where the scheme, considered as a whole, demonstrates that its object is to accelerate industrial development and generate employment by encouraging the establishment or substantial expansion of industries in backward areas, the incentive may constitute a capital receipt even though it is received after commencement of commercial production and is not subject to a specific end-use restriction.

339. Applying the aforesaid principles to the present case, we find that the excise-duty exemption was not available generally to every manufacturing unit carrying on business in Himachal Pradesh or Uttarakhand. Eligibility was confined to new industrial units and existing units undertaking substantial expansion in the specified areas. In the case of the assessee, the benefit became available upon substantial expansion of Gagal-I and Gagal-II involving substantial fresh investment and an increase of more than 50% in the book value of the assets. Thus, the eligibility for the incentive was founded upon capital investment and substantial expansion and not merely upon the conduct of regular manufacturing operations.

340. The Office Memorandum dated 07.01.2003 and Notification No. 50/2003 dated 10.06.2003, as considered by the CIT(A), disclose that the object of the scheme was to intensify and accelerate industrial development in the specified backward areas of Himachal Pradesh and Uttarakhand. The excise-duty exemption was the mechanism chosen for extending the incentive to eligible industrial units. The circumstance that the amount of the benefit was quantified with reference to the excise-duty liability arising after commencement of production does not alter the object of the scheme.

341. The AO treated the exemption as revenue in nature principally because it was available for ten years from the commencement of commercial production. This approach places undue emphasis on the stage at which the incentive materialised. As held in Ponni Sugarsand reiterated in Chaphalkar Brothers, the point of time at which the incentive is received and the mechanism through which it is granted are irrelevant once the object of the scheme is established. In the present case, the commencement of production merely triggered the quantification and availability of the benefit. It did not constitute the purpose for which the benefit was granted.

342. The AO also observed that no restriction was imposed upon the subsequent utilisation of the amount retained by the assessee. Although an end-use restriction may be a relevant circumstance, the decision in Chaphalkar Brothers, particularly its approval of Shree Balaji Alloys, establishes that the absence of an express requirement to utilise the incentive for purchasing capital assets is not conclusive. The object must be gathered from the scheme as a whole. In the present case, the eligibility conditions, specified geographical areas and requirement of substantial expansion collectively demonstrate that the scheme was intended to promote industrialisation through capital investment.

343. The further reasoning of the AO that the scheme separately provided for a capital-investment subsidy at 15% of the investment in plant and machinery, subject to a ceiling of Rs.30,00,000/-, also does not determine the character of the excise-duty exemption. An incentive package may contain more than one form of assistance. The existence of a direct capitalinvestment subsidy does not necessarily render every other incentive under the same package revenue in nature. Each component must be examined with reference to its object and eligibility conditions. The excise-duty exemption, though granted through a different mechanism, was also conditional upon the setting up of a new unit or substantial expansion of an existing unit in the specified backward areas.

344. The reliance placed by the AO upon Bhushan Steel & Strips Ltd. is distinguishable on the terms of the scheme recorded in the assessment order. In that case, the conclusion proceeded on the absence of a capital-utilisation condition under the relevant supplementary scheme and the finding that the incentive was intended to augment profitability. In the present case, eligibility was directly connected with the setting up of a new industrial undertaking or substantial expansion of an existing undertaking involving fresh investment. The object and eligibility conditions of the present scheme are materially different. The conclusion reached under another incentive scheme cannot be applied without examining these differences.

345. We have also perused the order of the Co-ordinate Bench in the assessee’s own case for A.Y. 2012-13. The corresponding ground of the Revenue concerning the excise-duty exemption was dismissed. However, the reasoning reproduced in paragraph 18 of that order relates to the treatment of unutilised MODVAT/CENVAT credit in the valuation of closing stock. The decisions in Indo Nippon Chemicals Co. Ltd., Diamond Dye Chem Ltd. and Mahindra & Mahindra Ltd. referred to therein do not concern the character of an excise-duty exemption under an industrial incentive scheme. We, therefore, do not rest our conclusion merely upon that portion of the earlier order.

346. Nevertheless, the mismatch in the reasoning reproduced in the earlier order does not require reversal of the CIT(A)’s conclusion. We have independently examined the object of the scheme, the eligibility conditions and the principles laid down by the Hon’ble Supreme Court in Ponni Sugars and Chaphalkar Brothers. On such examination, we find that the incentive was intended to promote the establishment and substantial expansion of industrial units in the specified backward areas and was not granted to reimburse recurring expenditure or merely supplement the assessee’s trading profits.

347. We further note that clause (xviii) of section 2(24), bringing specified forms of Government assistance within the definition of income, became effective from 01.04.2016 and applies from A.Y. 2016-17 onwards. The year under consideration is A.Y. 2015-16. The said amendment, therefore, does not govern the present year, and the character of the incentive is required to be determined by applying the purpose test laid down in the aforesaid decisions.

348. In view of the foregoing, we hold that the excise-duty exemption of Rs.267,10,28,547/- availed by the assessee under Notification No. 50/2003 dated 10.06.2003 constitutes a capital receipt and is not chargeable to tax under the normal provisions for A.Y. 2015-16. The CIT(A) was, therefore, justified in directing the AO to delete the addition. Revenue’s Ground No. xii is accordingly dismissed.

A.Y. 2016-17 Revenue’s Ground xvii – Balance 10% additional depreciation on assets put to use for less than 180 days in the preceding year

349. Revenue challenges the decision of the CIT(A) allowing the assessee’s claim for balance additional depreciation of Rs.22,75,66,963/- under section 32(1)(iia) in respect of plant and machinery acquired and put to use for less than 180 days during A.Y. 2015-16.

350. The facts recorded in the assessment order show that the assessee had originally claimed depreciation, including additional depreciation, of Rs.396,97,41,239/-. At the instance of the AO, the assessee furnished a revised computation based upon the assessed closing written-down value for A.Y. 2015-16 and computed depreciation, including additional depreciation, at Rs.533,93,44,481/-. The AO accepted the revised computation except to the extent of the balance additional depreciation of Rs.22,75,66,963/-.

351. The disputed claim related to assets acquired and installed during A.Y. 2015-16 but put to use for less than 180 days in that year. The year-specific details recorded by the CIT(A) are as under:

Particular s	Cost of assets	Additional depreciation claimed at 10% in A.Y. 2015-16	Balance 10% claimed in A.Y. 2016-17
Energysaving devices and renewable-energy-saving devices	Rs.9,08,89,596/-	Rs.90,88,960/-	Rs.90,88,960/-
Plant and machinery	Rs.218,47,80,032/-	Rs.21,84,78,003/-	Rs.21,84,78,003/-
Total	Rs.227,56,69,628/-	Rs.22,75,66,963/-	Rs.22,75,66,963/-

352. Since the assets had been put to use for less than 180 days during A.Y. 2015-16, the assessee claimed only 50% of the additional depreciation, being 10% of the cost, in that year. The balance 10% was claimed in the succeeding year, namely A.Y. 2016-17.

353. The AO observed that the third proviso to section 32(1), permitting the balance additional depreciation to be allowed in the immediately succeeding previous year, was inserted with effect from 01.04.2016. According to the AO, the amendment was applicable only to plant and machinery capitalised during the second half of A.Y. 2016-17 and not to assets capitalised during the second half of A.Y. 2015-16. He, therefore, disallowed the balance additional depreciation of Rs.22,75,66,963/- and allowed total depreciation of Rs.511,17,77,518/-, being Rs.533,93,44,481/- less the disputed amount of Rs.22,75,66,963/-.

354. Before the CIT(A), the assessee contended that the amendment inserted by the Finance Act, 2015 was clarificatory and retrospective in nature. Without prejudice, it was submitted that even before the amendment, section 32(1)(iia) conferred a substantive entitlement to additional depreciation at 20%. The restriction contained in the second proviso to section 32(1) merely deferred one-half of the allowance where the asset was put to use for less than 180 days. It did not extinguish the assessee’s entitlement to the balance 10%.

355. The assessee further submitted that the use of the expression “shall be allowed” in section 32(1)(iia) demonstrated that the full additional depreciation of 20% was mandatory once the statutory conditions were satisfied. The assessee relied upon judicial decisions holding that, where only 50% of the additional depreciation could be allowed in the year of acquisition because the asset was used for less than 180 days, the balance was allowable in the immediately succeeding year.

356. The CIT(A) accepted the assessee’s contention. He found that the judicial authorities relied upon by the assessee had held that the restriction to 50% operated only in the year in which the asset was first put to use for less than 180 days and that the balance additional depreciation remained allowable in the subsequent year. Following those decisions, the CIT(A) held that the assessee was entitled to the balance additional depreciation of Rs.22,75,66,963/- in A.Y. 2016-17 and consequently allowed Ground No. 12 of the assessee’s appeal.

357. The learned AR supported the order of the CIT(A) and submitted that the issue was covered in favour of the assessee by the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022.

358. We have considered the rival submissions and perused the material placed on record. The dispute concerns the allowability in A.Y. 2016-17 of the balance 10% additional depreciation of Rs.22,75,66,963/- in respect of new plant and machinery acquired and installed during the previous year relevant to A.Y. 2015-16 but put to use for less than 180 days in that year.

359. The relevant factual position is undisputed. During the previous year relevant to A.Y. 2015-16, the assessee acquired and installed energy-saving and renewable-energy-saving devices costing Rs.9,08,89,596/- and other plant and machinery costing Rs.218,47,80,032/-. Since these assets were put to use for less than 180 days, the assessee claimed additional depreciation at 10%, amounting to Rs.90,88,960/- and Rs.21,84,78,003/-respectively, aggregating to Rs.22,75,66,963/-, in A.Y. 2015-16. The assessee claimed the balance 10% additional depreciation of an identical amount in the immediately succeeding year, namely A.Y. 2016-17.

360. The AO disallowed the claim on the reasoning that the third proviso to section 32(1), inserted with effect from 01.04.2016, would apply only to plant and machinery acquired and capitalised in the second half of A.Y. 2016-17. The CIT(A), on the other hand, held that the assessee was entitled to the balance additional depreciation in the immediately succeeding year and directed the AO to allow the claim.

361. Before us, the learned AR placed reliance upon the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA Nos. 800 and 1171/Mum/2022, order dated 30.06.2023. We have carefully examined the said decision.

362. In paragraph 24, the Co-ordinate Bench observed that an identical issue had been decided in favour of the assessee for A.Y. 2007-08 and reproduced the relevant findings from the earlier order. The core legal principle reproduced therein, in paragraph 32 of the earlier order, reads as under:

“32. We have given very careful consideration to the rival submissions and are of the view that the provision of section 32(1)(iia) as amended w.e.f. 01-04-2006 by the Finance Act 2005, there is no restriction that the additional depreciation will be allowed only in one year or that it would be allowed only on the written down value. The law as it prevailed prior to the said amendment imposed such a condition that additional depreciation will be allowed only in the year of installation of machinery or plant or the year in which it is first put to use or the year in which the concerned undertaking begins to manufacture or produce any article or thing or achieves substantial expansion by way of increase in installed capacity by 25%. The only objection of the AO is that the provisions refer to new) machinery or plant’ and therefore the machinery will cease to be a new machinery after the end of the first year in which it is installed or put to use. In our view this stand taken by the revenue is not supported by the language of statutory provision. The condition imposed by the relevant provisions is that Plant and Machinery must be new at the time of installation to be eligible for additional depreciation u/s 32(1)(iia) and not new in subsequent years. The expression ‘new machinery’ is therefore to be construed as referring to the condition that at the time of acquisition or installation the machinery or plant should be new. Going by the legislative history of the relevant provision, we are of the view that the condition for allowing additional depreciation only in the initial assessment year ceased to exist as and from 01-04-2006. The plain language of the section warrants such an interpretation. We therefore uphold the order of CIT(A) and dismiss ground No.3 raised by the revenue.”

363. The earlier order reproduced in paragraph 24 of the decision for A.Y. 2013-14 also considered the contrary view in Everest Industries Ltd. v. Jt. CIT, Range-1 192 TTJ 904 (Mumbai) and the subsequent decisions in Graphite India Ltd. and Ambuja Cement Ltd. The conclusions contained in paragraph 50 of the reproduced order read as under:

“50. We observe that in decision of ITAT Kolkata in the case of DCIT v. Gloster Jute mills ltd. in ITA No. 1524/Kol/2013 dated 01.03.2017 has held that additional depreciation would be allowed in subsequent assessment years by observing that the condition imposed by the relevant provisions is that Plant and Machinery must be new at the time of installation to be eligible for additional depreciation u/s 32(1)(iia) and not new in subsequent years. The expression ‘new machinery’ is therefore to be construed as referring to the condition that at the time of acquisition or installation the machinery or plant should be new. Going by the legislative history of the relevant provision, ITAT held that the condition for allowing additional depreciation only in the initial assessment year ceased to exist as and from 01.04.2006.

However, subsequently in the Decision of ITAT Mumbai in the case of Everest Industries Ltd. v. JCIT Such decision was also referred by Ld DR in her written submission. In this decision, the decision of ITAT Kolkata in the case of DCIT v. Gloster Jute Mills Ltd. (supra) was distinguished and the case has been decided against the assessee on the ground that the Kolkatta bench of Tribunal has taken the view in favour of the assessee, on plain reading of the provisions of sec. 32(1)(iia) vis-a-vis old provisions, by holding that the additional depreciation prescribed u/s 32(1)(iia) of the Act is allowable every year and further held that the Kolkata bench of Tribunal did not consider the third proviso inserted by Finance Act, 2015. Since the legislative intent in inserting sec.32(1)(iia) has been made clear by the third proviso inserted in sec. 32(1) by Finance Act 2015, hence ITAT Mumbai did not follow the view expressed by the Kolkatta bench of Tribunal in the case of Gloster Jute Mills (supra).

It is pertinent to refer to the Decision of Hon’ble ITAT Kolkata in the case of DCIT v. Graphite India Ltd. in ITA No. 472/Kol/2018 dated 22.11.2019 wherein both of the above decisions of ITAT Kolkata as well as ITAT Mumbai has been duly considered and has decided in the favour of the assessee. In this decision, decision of ITAT Mumbai in the case of Everest Industries Limited (supra), was referred in finding of CIT(A). The ITAT has followed Gloster Jute Mills Ltd. (supra) and has decided the issue in assessee’s favour.

It is observed that coordinate bench in its later decision in the case of Ambuja Cement Limited(supra), holding company of assessee has allowed similar claim of depreciation. When coordinate bench of ITAT in its latest decision has decided issue in favour of assessee by holding that assessee is entitled for additional depreciation u/s 32(1)(iia), such later decision would prevail over the decision of Everst Industries Limited relied upon by Ld DR. As a result, since this aspect of the matter is no longer res integra, we see no reasons to take any other view of the matter than the view so taken by the coordinate bench in the group concern’s case of the assessee. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to allow depreciation u/s.32(1)(iia) of the Act. The assessee gets the relief accordingly. This ground of appeal is allowed.”

364. The issue considered in A.Y. 2013-14 was broader in scope. The assessee had claimed additional depreciation on the original cost of eligible machinery in a year subsequent to the year of acquisition and installation. The Co-ordinate Bench held that the condition that the machinery must be “new” applied at the stage of acquisition and installation and did not require the machinery to remain new in the subsequent year in which additional depreciation was claimed. It further held that, after the amendment effective from 01.04.2006, section 32(1)(iia) did not confine the allowance exclusively to the initial year.

365. The present claim stands on a narrower and stronger statutory footing. The assessee is not claiming additional depreciation repeatedly or at 20% in every subsequent year. It is claiming only the balance 10% which could not be allowed in A.Y. 2015-16 solely because the assets were put to use for less than 180 days. The total additional depreciation claimed over the two years remains restricted to 20% of the actual cost.

366. The third proviso to section 32(1), inserted by the Finance Act, 2015 with effect from 01.04.2016, expressly provides that where an asset eligible under section 32(1)(iia) is acquired and put to use for less than 180 days and the additional depreciation is restricted to 50% in that previous year, the balance 50% shall be allowed in the immediately succeeding previous year. The statutory provision 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.”

367. The object and applicability of the amendment have also been explained in paragraphs 13.2 and 13.3 of CBDT Circular No. 19 of 2015 as under:

“13.2 To remove the discrimination in the manner of allowing additional depreciation on plant or machinery used for less than 180 days and plant or machinery used for 180 days or more, a new proviso has been inserted to section 32(1)(ii) of the Income-tax Act so as to provide that the balance 50% of the additional depreciation allowance 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.

13.3 Applicability: – This amendment takes effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.”

368. The Circular thus unequivocally clarifies that the amendment applies from A.Y. 2016-17 and provides for allowance in that assessment year of the balance additional depreciation which remained unallowed in the year of acquisition and installation. The relevant CBDT Circular No. 19 of 2015 expressly states the effective assessment year.

369. The AO’s interpretation that the proviso would apply only to machinery acquired in the second half of A.Y. 2016-17 cannot be accepted. If machinery were acquired and used for less than 180 days during the previous year relevant to A.Y. 2016-17, the balance additional depreciation would become allowable only in A.Y. 2017-18. Such an interpretation would postpone the operative effect of the amendment by one assessment year, notwithstanding the express provision that it applies from A.Y. 2016-17.

370. For the amendment to operate from A.Y. 2016-17, it must necessarily apply to the deduction claimed in that assessment year in respect of eligible machinery acquired and put to use for less than 180 days in the immediately preceding previous year relevant to A.Y. 2015-16. This is precisely the factual position before us.

371. We, therefore, find that the ratio of the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 supports the proposition that additional depreciation is not extinguished merely because it could not be fully allowed in the initial year. The present claim is additionally and directly supported by the third proviso to section 32(1), which applies from A.Y. 2016-17 and mandates allowance of the balance 50% in the immediately succeeding previous year.

372. Accordingly, the assessee was entitled to the balance 10% additional depreciation of Rs.22,75,66,963/- in A.Y. 2016-17. The CIT(A) correctly directed the AO to allow the claim. We find no infirmity in the impugned decision. Revenue’s Ground No. xvii is accordingly dismissed.

A.Y. 2018-19 – Revenue’s Ground iii – Allowability of bad debts under section 36(1)(vii)

373. Revenue challenges the decision of the CIT(A) deleting the disallowance of bad debts of Rs.35,10,209/- claimed by the assessee under section 36(1)(vii).

374. The AO observed that the assessee had claimed a deduction of Rs.35,10,209/- towards bad debts written off. Relying upon the decision of the Bangalore Bench of the Tribunal in SAP India (P.) Ltd. v. DCIT, the AO held that, apart from writing off the amount, the assessee was required to establish compliance with section 36(2). The AO noticed that certain debts pertained to existing concerns or entities, including Shapoorji Pallonji, TCI, Gannon Dunkerley & Co. Ltd. and Executive Engineer, Tea Board. According to the AO, the continued existence of these parties raised a doubt regarding the claim that the corresponding debts had become bad.

375. The AO further relied uponA.V. Thomas and Co. Ltd. v. CIT [1963] 48 ITR 67 (SC) and observed that, before an amount could be allowed as a bad debt, it had to be established that the amount represented a proper debt. The AO held that the details furnished did not adequately disclose the nature of the transactions entered into with the concerned parties. He, therefore, concluded that it was not possible to ascertain whether the amounts written off represented debts satisfying the requirements of section 36(2). Accordingly, the deduction of Rs.35,10,209/- was disallowed.

376. Before the CIT(A), the assessee explained that it followed the mercantile system of accounting. Whenever recovery from a debtor became uncertain, a provision for bad and doubtful debts was created and debited to the profit and loss account. Such provision was, however, added back while computing taxable income because a mere provision was not claimed as a deduction.

377. The assessee further explained that when a debt was actually written off, it was either adjusted against the existing provision or separately written off against the provision in the books. Since the actual write-off against the provision did not result in a fresh debit to the profit and loss account, the amount was separately claimed as a deduction in the computation of total income. Thus, according to the assessee, no deduction was claimed when the provision was initially created, and the deduction was claimed only once, at the stage of actual write-off.

378. The assessee submitted that the aforesaid accounting treatment had been explained to the AO through its letter dated 17.09.2021. Along with the said letter, the assessee had furnished a party-wise break-up of the bad debts and sample ledger accounts. The ledger accounts also contained the corresponding invoice particulars.

379. The assessee further explained that the amounts written off arose from sales made to customers. The corresponding sales had been recognised as income in the year of accrual and, therefore, the condition prescribed under section 36(2) stood satisfied. It was also clarified that the amounts represented deficiencies in actual recovery from customers and were neither advances nor a mere provision for doubtful debts.

380. The CIT(A) examined the decision in SAP India (P.) Ltd. relied upon by the AO. The CIT(A) observed that the matter in that case had been restored because the assessee therein had not furnished the precise nature of the transactions with the concerned parties and it was, therefore, not possible to verify compliance with section 36(2). In the present case, however, the assessee had furnished the letter dated 17.09.2021, party-wise details, sample ledger accounts and invoice particulars. The CIT(A), therefore, found that the factual deficiency noticed in SAP India (P.) Ltd. was not present in the assessee’s case.

381. The CIT(A) further observed that the assessee had specifically explained that the debts arose from sales made to customers and that the corresponding income had already been offered to tax. The assessee had also clarified that the amounts represented actual deficiencies in recovery and were not advances. According to the CIT(A), the assessee had discharged its primary onus by furnishing the relevant explanation and documentary evidence.

382. The CIT(A) noted that the AO had not identified any specific defect in the party-wise particulars, invoices or ledger accounts submitted by the assessee. If the AO required any further clarification, a specific query could have been raised. However, the claim was disallowed without dealing with the evidence furnished or disproving the assessee’s assertion that the corresponding sales had already been included in its taxable income.

383. The CIT(A) rejected the AO’s reasoning that a debt could not be written off merely because the concerned debtor continued to exist. Referring to the amendment made to section 36(1)(vii) with effect from 01.04.1989 and the decision of the Hon’ble Supreme Court in T.R.F. Ltd. v. CIT [2010] 230 CTR 14/323 ITR 397 (SC), the CIT(A) observed that it was no longer necessary for an assessee to establish that the debt had, in fact, become irrecoverable. The relevant passage reproduced by the CIT(A) reads as under:

“After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1)(vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee.” (para 8.3.4)

384. The CIT(A) accordingly held that the deduction would be allowable where the debt was written off as irrecoverable in the books and the condition under section 36(2), namely that the corresponding debt had been taken into account in computing the income of the relevant or an earlier previous year, was satisfied.

385. The CIT(A) recorded a factual finding that the assessee had discharged its onus by furnishing the relevant details and evidence. The AO had not disproved the assessee’s contentions that the amounts represented unrealised trade debts, that the corresponding sales had already been offered to tax and that the requirements of section 36(2) stood satisfied. Consequently, the CIT(A) directed the AO to delete the disallowance of Rs.35,10,209/- and allowed Ground No. 3 of the assessee’s appeal.

386. The learned AR relied upon the order of the CIT(A) and submitted that the assessee had duly satisfied the conditions prescribed under section 36(1)(vii) read with section 36(2).

387. We have considered the rival submissions and perused the material placed on record. The issue is whether the CIT(A) was justified in deleting the disallowance of bad debts of Rs.35,10,209/- claimed by the assessee under section 36(1)(vii).

388. For allowing a deduction of bad debts, two material requirements are required to be satisfied. First, the debt must be written off as irrecoverable in the accounts of the assessee during the relevant previous year. Secondly, in terms of section 36(2), the debt must have been taken into account while computing the income of the assessee for the relevant previous year or an earlier previous year, unless it represents money lent in the ordinary course of banking or money-lending business.

389. The assessee explained its accounting treatment before the AO vide letter dated 17.09.2021. When recovery from a customer became doubtful, the assessee created a provision for bad and doubtful debts and debited the provision to the profit and loss account. However, the provision was added back in the computation of taxable income and no deduction was claimed at that stage. When a specific debt was subsequently written off, it was adjusted against the provision. Since the write-off against the provision did not result in a fresh debit to the profit and loss account, the amount was separately claimed in the computation of income.

390. The accounting treatment adopted by the assessee does not result in a deduction of a mere provision. The provision was expressly added back while computing taxable income. The deduction was claimed only when the identified trade debts were actually written off against the provision. There was, therefore, no double deduction, nor was the deduction claimed merely on the basis of an unascertained provision.

391. The AO did not dispute that the identified amounts had been written off in the accounts. His principal objection was that some of the debtors continued to exist and that the assessee had not sufficiently established the nature of the transactions giving rise to the debts. The continued existence of a debtor, by itself, cannot be a valid ground for denying the deduction after the amendment of section 36(1)(vii) with effect from 01.04.1989.

392. The legal position was settled by the Hon’ble Supreme Court in T.R.F. Ltd. (supra). The relevant ratio, as reproduced by the CIT(A) in paragraph 8.3.4, reads as under:

393. CBDT Circular No. 12 of 2016 dated 30.05.2016 also explains that the amendment was intended to eliminate litigation regarding the requirement to establish that a debt had actually become irrecoverable. The Circular directs that no appeal should be filed merely because the assessee has not established factual irrecoverability where the debt has been written off and the conditions of section 36(2) are fulfilled.

394. Therefore, the AO’s observation that Shapoorji Pallonji, TCI, Gannon Dunkerley & Co. Ltd. and the other concerned entities continued to exist does not determine the allowability of the deduction. A debt may become commercially irrecoverable wholly or partly even though the debtor continues to exist. After 01.04.1989, the AO is not required to adjudicate whether the assessee’s commercial decision to write off the debt was objectively correct. What is required is an actual write-off in the accounts and compliance with section 36(2).

395. The AO also relied upon SAP India (P.) Ltd. (supra). The relevant observations from paragraph 5 of that decision, as reproduced in paragraph 8.3.2 of the CIT(A)’s order, read as under:

“We find that apart from writing off of bad debts in the books of accounts, the assessee has to fulfill this requirement of section 36(2) of the IT Act also that the amount in question has been considered as income in the relevant year or in an earlier year. As per the assessment order and as per the order of CIT(A), the assessee has not given any explanation or details regarding exact nature of transactions with the parties in question. In the absence of that, it cannot be ascertained as to whether the assessee is complying with the requirements of section 36(2) of Income Tax Act, 1961 or not.”

396. The decision in SAP India (P.) Ltd. does not support the disallowance on the facts of the present case. In that case, the matter was restored because the precise nature of the underlying transactions and compliance with section 36(2) could not be ascertained from the material furnished. In the present case, the CIT(A) recorded a categorical finding that the assessee had furnished before the AO its letter dated 17.09.2021, the partywise break-up of bad debts, sample ledger accounts and the corresponding invoice details.

397. The assessee had explained that the amounts written off represented unrealised balances arising from sales made to customers. The sales had been recognised as income when they accrued. The amounts were neither loans nor advances and represented deficiencies in the actual recovery of trade receivables. Thus, the very factual particulars which were absent in SAP India (P.) Ltd. were furnished by the assessee in the present case.

398. The decision in A.V. Thomas & Co. Ltd. (supra), relied upon by the AO for the proposition that the amount must first constitute a debt, also does not advance the Revenue’s case. The assessee furnished the party-wise details, customer ledger accounts and invoice particulars demonstrating that the amounts arose from sales. The CIT(A) recorded a factual finding that the transactions represented unrealised trade debts and that the corresponding income had already been offered to tax. The requirement that the amounts should constitute proper debts was, therefore, satisfied.

399. We further find that the AO did not point out any specific defect in the party-wise details, ledger accounts or invoice particulars submitted by the assessee. The AO also did not identify any debt whose corresponding sale had not been recognised as income. No material was brought on record to controvert the assessee’s explanation that the debts arose from sales already offered to tax. If the AO required any further particulars, a specific query could have been raised. The claim could not be disallowed merely by making a general observation that the nature of the transactions was not ascertainable, without dealing with the documentary evidence already furnished.

400. The CIT(A), after examining the evidence, recorded the following categorical finding in paragraph 8.3.5:

“Based on the above discussion, it is noted that the appellant had thus discharged its onus by submitting the relevant claims, and the AO has not disproved the contentions of the appellant that the impugned transactions were in the nature of unrealized debtors whose sales/corresponding income were already offered to tax in earlier years, and also the contention of the appellant that the provisions of section 36(2) of the Act were being satisfied in the instant case.”

401. The Revenue has not brought before us any material demonstrating that the aforesaid factual finding of the CIT(A) is incorrect. There is no specific challenge to the genuineness of the invoices, the customer ledger accounts, the actual write-off or the inclusion of the corresponding sales in taxable income. The conditions prescribed under section 36(1)(vii) read with section 36(2) consequently stand satisfied.

402. In view of the foregoing, we find no infirmity in the decision of the CIT(A) directing deletion of the disallowance of Rs.35,10,209/-. The order of the CIT(A) on this issue is upheld and Revenue’s Ground No. iii is accordingly dismissed.

Assessee’s Cross Objection for A.Y. 2015-16

403. For A.Y. 2015-16, after excluding Ground No. 2 relating to section 14A, the remaining grounds of the assessee’s crossobjection are:

Ground No.	Issue	Amount involved
1	Validity of the assessment order on the ground of limitation	—
3	Disallowance of provision for leave encashment despite actuarial valuation	Rs.5,67,83,788/-
4	Apportionment of indirect Head Office expenses while computing deduction under section 80-IA for eligible captive power plants and rail system	Head Office expenses: Rs.220,24,55,943/-; allocation: Rs.62,79,96,792/-
5	Exclusion of profit on sale of investments and loss on sale of fixed assets while computing book profit under section 115JB	Profit: Rs.25,45,47,728/-; loss: Rs.14,03,93,156/-
6	Addition of provision for interest on income-tax while computing book profit under section 115JB	Rs.19,34,38,553/-
7	General ground seeking leave to add, amend or alter the grounds	—

404. At the outset, the learned AR submitted that Ground No. 1 of the cross-objection, challenging the validity of the assessment order on the ground of limitation, is not pressed. Accordingly, Ground No. 1 of the assessee’s cross-objection is dismissed as not pressed, leaving the legal issue raised therein open.

405. Ground No. 7 is general in nature, seeking liberty to add, amend or alter the grounds of cross-objection. Since no additional or modified ground was urged before us, Ground No. 7 does not call for separate adjudication and is dismissed.

Ground No.4 – Apportionment of indirect Head Office expenses while computing deduction under section 80-IA for eligible captive power plants and rail system

406. Ground No. 4 of the assessee’s cross-objection concerns the apportionment of indirect Head Office expenses aggregating to Rs.220,24,55,943/- and the consequent reduction of Rs.62,79,96,792/- from the profits of the eligible captive power plants and rail system while computing deduction under section 80-IA.

407. This issue is integrally connected with the corresponding grounds raised by the Revenue concerning the allocation of indirect Head Office expenses. While adjudicating those grounds, we have held that an expenditure can be allocated to an eligible undertaking only upon establishing a direct or reasonably identifiable nexus between the nature of the expenditure and the activities of that undertaking. A general or proportionate allocation, unsupported by such nexus, cannot be sustained merely because the assessee maintains a common Head Office.

408. The same findings apply mutatis mutandis to the present ground. Since no specific nexus between the impugned Head Office expenses and the eligible captive power plants or rail system has been established, the CIT(A) was not justified in sustaining the allocation of Rs.62,79,96,792/-. We, therefore, direct the AO to delete the said allocation while computing the deduction under section 80-IA. Accordingly, Ground No. 4 of the assessee’s cross-objection is allowed.

Ground No. 3: Disallowance of provision for leaveencashment despite actuarial valuation

409. Ground No. 3 of the assessee’s cross-objection challenges the disallowance of provision for leave encashment amounting to Rs.5,67,83,788/-, created on the basis of an actuarial valuation.

410. The assessee had debited the aforesaid provision to its Profit and Loss Account. During the assessment proceedings, the assessee contended that the provision represented an ascertained liability computed in accordance with AS-15 and settled accounting principles. The AO, however, held that clause (f) of section 43B permits deduction of any sum payable by an employer in lieu of leave standing to the credit of an employee only in the year of actual payment. The AO accordingly disallowed the provision of Rs.5,67,83,788/-. At the same time, he allowed deduction of Rs.17,81,97,959/- representing leave encashment actually paid during the year. After adjusting the provision already debited to the Profit and Loss Account, the resultant additional deduction allowed by the AO was Rs.12,14,14,171/-.

411. Before the CIT(A), the assessee submitted that the liability had accrued during the year and had been determined on the basis of an actuarial valuation. Reliance was placed upon the decision of the Hon’ble Supreme Court in Bharat Earth Movers v. CIT [2000] 162 CTR 325/245 ITR 428 (SC) and certain other decisions. It was also contended that Explanation 2 to section 43B applies only to clause (a) and, therefore, could not be extended to clause (f).

412. The CIT(A), in paragraphs 20.1 to 20.3 of the impugned order, rejected the claim. The CIT(A) noted that an identical issue had been decided against the assessee by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14 in ITA No.800/Mum/2022. The Co-ordinate Bench had followed the decision of the Hon’ble Supreme Court in Union of India v. Exide Industries Ltd. [2020] SC). Consequently, the CIT(A) upheld the disallowance of Rs.5,67,83,788/-.

413. Before us, the learned AR relied upon the submissions made before the CIT(A) and left the issue to the wisdom of the Bench. The learned DR supported the orders of the lower authorities.

414. We have considered the rival submissions and perused the material placed on record. Section 43B(f) specifically provides that any sum payable by an assessee as an employer in lieu of leave standing to the credit of an employee shall be allowed as a deduction only upon actual payment. The Hon’ble Supreme Court in Union of India v. Exide Industries Ltd. (supra), while upholding the validity of section 43B(f), explained the operation of section 43B in paragraphs 20 and 21 as under:

“20. Section 43B, however, is enacted to provide for deductions to be availed by the Assessee in lieu of liabilities accruing in previous year without making actual payment to discharge the same. It is not a provision to place any embargo upon the autonomy of the Assessee in adopting a particular method of accounting, nor deprives the Assessee of any lawful deduction. Instead, it merely operates as an additional condition for the availment of deduction qua the specified head.

21.Section 43B bears heading „certain deductions to be only on actual payment’. It opens with a non-obstante clause. As per settled principles of interpretation, a non obstante Clause assumes an overriding character against any other provision of general application. It declares that within the sphere allotted to it by the Parliament, it shall not be controlled or overridden by any other provision unless specifically provided for.”

415. The identical issue was considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. Paragraphs 42 to 44 of the order read as under:

“42. With regard to Ground No. 8 which is in respect of Denial of claim for deduction of Leave Encashment on provision basis, Ld. AR of the assessee submitted that this ground is conceded on account of the supreme court decision in the case of UOI v. Exide Industries Limited (425 ITR 1). Further, he prayed that the direction be given to allow the claim on payment basis.

43.On the other hand, Ld. DR has relied on the order of the lower authorities.

44.Considered the rival submissions and material placed on record, similar issue has been considered by the Hon’ble Supreme Court in the case of UOI v. Exide Industries Limited (supra) and decided the issue against the assessee. Accordingly, the ground raised by the assessee is dismissed.”

416. The principle laid down in Bharat Earth Movers (supra), concerning the accrual and ascertainment of a business liability, does not dispense with the additional statutory condition of actual payment prescribed by section 43B(f). Even where the liability is ascertained through actuarial valuation, its deduction under the normal provisions remains subject to actual payment. Similarly, the assessee’s contention concerning the limited application of Explanation 2 cannot override the express language of clause (f) and the binding decision in Exide Industries Ltd. (supra).

417. In the present case, the AO has already allowed deduction of Rs.17,81,97,959/- representing the leave encashment actually paid during the relevant previous year. Therefore, no further deduction in respect of the provision of Rs.5,67,83,788/- can be allowed. We find no infirmity in the conclusion reached by the CIT(A). Accordingly, Ground No. 3 of the assessee’s crossobjection is dismissed.

Ground No.5 – Exclusion of profit on sale of investments and loss on sale of fixed assets while computing book profit under section 115JB

418. We shall now deal with Ground No. 5 of the assessee’s cross-objection concerning the exclusion, while computing book profit under section 115JB, of:

Profit on sale of investments amounting to Rs.25,45,47,728/-; and

ii.

Loss on sale of fixed assets amounting to Rs. 14,03,93,156/-.

419. The assessee contends that these amounts arose from the disposal of capital assets, were capital in nature and did not constitute income from its ordinary business operations. The assessee, therefore, claims that the net amount ought to be excluded while computing book profit under section 115JB.

420. The learned AR submitted that the profit on sale of investments amounting to Rs.25,45,47,728/- and the loss on sale of fixed assets amounting to Rs.14,03,93,156/- arose from the disposal of capital assets. It was contended that the assessee is engaged in the business of manufacturing and sale of cement and that the aforesaid items did not represent operational income arising in the ordinary course of its business. The learned AR, therefore, submitted that these capital items ought to be excluded while computing book profit under section 115JB.

421. The learned AR placed reliance upon the decision of the Hon’ble Calcutta High Court in Pr. CIT, Central-2, Kolkata v. Ankit Metal & Power Ltd. (Calcutta). Referring to the said decision, he submitted that a receipt which does not bear the character of income cannot form part of book profit under section 115JB. According to him, section 115JB is only a machinery provision for computing book profit and cannot be employed to bring to tax a capital receipt which falls outside the charging provisions of the Act.

422. The learned AR further relied upon the decision of the Ahmedabad Bench of the Tribunal in Nirma Ltd. v. DCIT [IT Appeal No. 1412 (Ahd) of 2019] and connected appeals, order dated 28.08.2025. It was submitted that the Tribunal, following the principle enunciated in Ankit Metal & Power Ltd. (supra), held that a capital receipt not chargeable to tax could not indirectly be subjected to tax under section 115JB. It was further submitted that the adjustments permissible under Explanation 1 to section 115JB are exhaustive and that an item cannot be included in book profit unless its inclusion is specifically authorised by that Explanation.

423. Applying these principles, the learned AR submitted that the profit arising from the sale of investments and the loss arising from the sale of fixed assets were capital items and not operational income of the assessee. He, therefore, prayed that the impugned adjustment made while computing book profit under section 115JB be deleted and Ground No. 5 of the cross-objection be allowed.

424. We have considered the rival submissions and perused the material placed on record, including the decisions relied upon by the learned AR.The controversy is whether the profit on sale of investments amounting to Rs.25,45,47,728/- and the loss on sale of fixed assets amounting to Rs.14,03,93,156/- can be excluded from the net profit disclosed in the audited Profit and Loss Account while computing book profit under section 115JB merely because they arose from the transfer of capital assets.

425. In Ankit Metal & Power Ltd. (supra), the Hon’ble Calcutta High Court was concerned with interest subsidy and power subsidy granted under schemes formulated for setting up industries in backward areas. After applying the purpose test, the Hon’ble High Court first held that the subsidies were capital receipts which did not fall within the definition of income under section 2(24). It was only upon recording that foundational finding that the Hon’ble High Court, in paragraph 27, held as under:

“27. In this case since we have already held that in relevant assessment year 2010-11 the incentives ‘Interest subsidy’ and ‘Power subsidy’ is a ‘capital receipt’ and does not fall within the definition of ‘ncomie’ under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961.”

426. Thus, the ratio of the decision is applicable where the receipt in question is first found to be outside the definition of income and not chargeable under any charging provision of the Act. The decision does not lay down that every receipt or accounting result connected with a capital asset must be excluded from book profit under section 115JB.

427. The decision of the Ahmedabad Bench in Nirma Ltd. (supra) and connected appeals, order dated 28.08.2025, also concerned a sales tax subsidy received under a backward-area development scheme. The Tribunal first held that the subsidy was a capital receipt not chargeable to tax and thereafter, in paragraphs 20 and 21, held as under:

“20. By way of an additional ground, the assessee has contended that the sales tax subsidy of Rs. 7,22,34,860/-, already held to be a capital receipt not chargeable to tax under the normal provisions, ought to be excluded from the computation of book profit under section 115JB as well.”

“21. It is a settled proposition that the adjustments under Explanation 1 to section 115JB are exhaustive, and unless a particular item is specifically required to be added back, it cannot be included in book profits. Since the sales tax subsidy in question is admittedly a capital receipt, not chargeable to tax under the normal provisions of the Act, the same cannot be subjected to tax indirectly under the MAT provisions. Respectfully following the binding precedents and in absence of any material change in facts or legal position, we direct that the subsidy of Rs. 7,22,34,860/- be excluded from the computation of book profit under section 115JB. Accordingly, the assessee’s additional ground is allowed.”

428. The above decision also proceeds upon an antecedent finding that the subsidy was not chargeable to tax at all. It does not deal with profit or loss arising upon the transfer of investments or fixed assets. Therefore, both the decisions relied upon by the learned AR are distinguishable on facts and do not govern the present controversy.

429. In the present case, the assessee has not demonstrated that the profit on sale of investments is a receipt outside the ambit of income or that the transfer giving rise to such profit falls outside the charging provisions of the Act. A profit arising upon the transfer of a capital asset does not cease to bear the character of income merely because the underlying asset is a capital asset. Capital gains are specifically included in the definition of income and are chargeable under the relevant provisions of the Act. Similarly, a loss arising on the sale of a fixed asset is an accounting item forming part of the net profit as per the audited Profit and Loss Account. Its treatment under section 115JB must be governed by the statutory computation mechanism and not merely by describing it as a capital item.

430. Section 115JB proceeds from the net profit disclosed in the Profit and Loss Account prepared in accordance with the applicable provisions of the Companies Act. The adjustments permissible to such net profit are those expressly provided in Explanation 1. Neither the profit arising from the sale of investments nor the loss arising from the sale of fixed assets falls within any clause permitting its exclusion merely because it arises from a capital asset. The contention that these items are not operational income of the assessee is also not determinative for the purposes of section 115JB, which is based upon the statutory book profit and not upon the concept of operational profit alone.

431. We further find that the identical issue was considered by the Co-ordinate Bench in the assessee’s own case for A.Y. 201213 in ITA No.3203/Mum/2018. In paragraphs 75 to 77, the Coordinate Bench held as under:

“75. In the Ground No.15, Assessee has raised the following grievance:

‘On facts and in the circumstances of the case, the Ld. CIT(A) was not justified and grossly erred in confirming tire action of AO in not excluding capital profits being profit on sale of investments and profit of sale of fixed assets of Rs 45,88,07,063/- and Rs 2,57,91,950/-respectively in the computation of book profits under Section 115JB’

76.Similar issue was considered by us in the assessee Appeal in Ground No 7 in AY 2005-06 and held as under:”

“113. On perusal of the aforesaid decision, it is evident that the assessee will be entitled to indexed cost of acquisition while computing capital gains u/s 115JB of the Act. It is also to be noted that in the immediately preceding year Coordinate Bench has held that long term capital gains credited in the books of accounts is taxable to which even the Ld. AR fairly conceded subject to the decisions as relied supra. However, he claimed that the indexed cost of acquisition does not form part of income computed u/s 115JB of the Act. Respectfully following the ratio laid down by Hon’ble Karnataka High Court, the Assessing Officer is directed to recompute taxable long term capital gains arising on transfer of fixed assets after giving the benefit of indexed cost of acquisition while computing taxable profits u/s 115JB of the Act. Thus, the related ground of appeal in Departmental Appeal as well as Assessee’s appeal is partly allowed subject to the above directions.”

“77. Respectfully following the above said decision, we partly allow the ground raised by the assessee.”

432. The CIT(A), in paragraph 27.2 of the impugned order, followed the aforesaid decision and directed the AO to include the profit arising from the sale of fixed assets and investments while computing book profit under section 115JB, after granting the benefit of indexed cost of acquisition. No material difference in the underlying facts has been demonstrated before us.

433. The subsequent decisions relied upon by the learned AR, being confined to subsidies found to be non-income capital receipts, do not displace the assessee-specific decision governing profits arising from the transfer of capital assets. We, therefore, find no reason to interfere with the conclusion reached by the CIT(A). The direction of the CIT(A) to grant the benefit of indexed cost of acquisition shall, however, be given full effect while recomputing the book profit.

434. Accordingly, Ground No. 5 of the assessee’s cross-objection is dismissed.

Ground No.6 – Addition of provision for interest on incometax while computing book profit under section 115JB

435. We shall now deal with Ground No. 6 of the assessee’s cross-objection concerning the addition of provision for interest on income-tax amounting to Rs.19,34,38,553/- while computing book profit under section 115JB.The issue is whether the provision represents interest forming part of income-tax within the meaning of clause (a) read with Explanation 2 to section 115JB, or whether it is an independently ascertained business liability which cannot be added while computing book profit.

436. The learned AR submitted that the provision for interest on income-tax amounting to Rs.19,34,38,553/- was not liable to be added while computing book profit under section 115JB. It was contended that the provision had been created on a prudent basis and did not represent income-tax actually charged under the Act. According to the learned AR, it also did not constitute a provision for an unascertained liability.

437. The learned AR further submitted that the impugned provision was not covered by any of the specific adjustments prescribed in Explanation 1 to section 115JB. Since the adjustments permitted to the net profit disclosed in the Profit and Loss Account are exhaustive, no addition could be made in the absence of an express statutory provision authorising it. The learned AR accordingly prayed that the addition of Rs.19,34,38,553/- be deleted and Ground No. 6 of the crossobjection be allowed.

438. We have considered the rival submissions and perused the material placed on record. It is undisputed that the amount of Rs.19,34,38,553/- debited to the Profit and Loss Account represents a provision for interest on income-tax. Clause (a) of Explanation 1 to section 115JB requires the amount of incometax paid or payable and the provision therefor to be added to the net profit. Explanation 2 further clarifies that, for the purposes of clause (a), the amount of income-tax includes “any interest charged under this Act”.

439. Therefore, the argument that the impugned amount is merely a prudent provision and does not represent income-tax actually charged cannot assist the assessee. Clause (a) specifically covers not only the amount actually paid or payable but also the provision made therefor. Further, once the provision relates to interest arising under the Income-tax Act, it falls within the extended meaning of income-tax under Explanation 2. The question whether the liability is ascertained or unascertained is consequently immaterial because, even if it is treated as an ascertained liability, the amount is expressly covered by clause (a) of Explanation 1.

440. We further find that the identical issue was decided against the assessee by the Co-ordinate Bench in the assessee’s own case for A.Y. 2013-14. In paragraph 48 of the order, the Co-ordinate Bench reproduced the findings rendered for A.Y. 2010-11. The relevant conclusion in paragraph 111 of that earlier decision reads as under:

“It is observed that explanation 2 to Section 115JB clearly provides that amount of Income Tax would be subject to upwards adjustment while computing Book Profit. Such Explanation also provides that any interest charged under the Act would be subject to positive adjustment. Though, in assessee’s case, interest u/s.244A charged to Profit & Loss account is not recovered by Assessing Officer by passing any order but same is provided based upon past experience based upon assessment orders / appellate orders in case of assessee hence such interest provided in the books of account in actual sense partakes the character of interest as provided in explanation 2 to section 115JB of the act.”

441. The facts and the statutory provisions applicable to the year under consideration are identical. The CIT(A), therefore, correctly directed that the provision for interest on income-tax amounting to Rs.19,34,38,553/- be added while computing book profit under section 115JB. We find no infirmity in the impugned conclusion.

442. Accordingly, Ground No. 6 of the assessee’s cross-objection is dismissed.

443. In the combined result, ITA No.1371/Mum/2024 for A.Y. 2014-15, ITA No.4014/Mum/2025 for A.Y. 2015-16, ITA No.1370/Mum/2024 for A.Y. 2016-17 and ITA No.4016/Mum/2025 for A.Y. 2018-19, filed by the Revenue, are dismissed, subject to the directions given hereinabove. CrossObjection No.198/Mum/2025 for A.Y. 2015-16 is partly allowed, whereas Cross-Objection No.197/Mum/2025 for A.Y. 2018-19 is dismissed as not pressed.