Arm’s length interest rate computable based on market determined rate applicable to currency in which loan is repayable

Adani Power Ltd. Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid.

Facts- Assessee M/s Adani Power Ltd has contributed a sum of Rs. 1,35,42,00,000/- to M/s Adani Power Pte Ltd and a sum of Rs. 2,89,30,91,520/- to M/s Adani Shipping Pte Ltd, both being Associated Enterprises of the assessee.

Assessee was of the view that the sums advanced by the assessee company to its AEs were in the nature of quasi equity and the assessee company in its transfer pricing report also reported the aforesaid transactions as quasi equity.

TPO was of the view that the aforesaid amount advanced by the assessee company to its overseas AE’s were not in the nature of quasi capital but was in the nature of loan and the same was required to be benchmarked u/s. 92 of the Act. The TPO held that providing of loan by the assessee company to overseas AEs without charging any interest goes against the principal of arm’s-length price (ALP) since unrelated lenders do not provide interest free loans to independent unrelated Enterprises. TPO held that the nature of advances made by the assessee to the AE’s was in the nature of debt and had no character of equity funding. The AO accordingly held that the assessee should have charged interest at the rate of 5.3 8% which was the prime lending rate-PLR prevailing in Singapore.

Accordingly, adjustment of Rs. 23,11,66,577/- on account of interest charged on aforesaid impugned interest free loan for entire year was made.

CIT(A) reduced the addition from Rs. 23,11,66,577/- to Rs. 5,10,53,900/-. Revenue has preferred the present appeal in respect of substantial relief granted to the assessee.

Conclusion- Held that where advances were given by assessee to its AEs and no interest was charged on these advances contending that they were not loans but were quasi-capital in nature, since assessee was unable to substantiate same with evidence, advances were in nature of loans and transfer- pricing adjustment made by charging interest applying LIBOR was justified.

Held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These are two cross appeals filed by the Department and the assessee for assessment years 2010-11 and 2011-12 are arising out of the orders passed by Ld. CIT(Appeals) dated 20-10-2015 and 30-06-216 respectively. Since common issues are involved in the years under consideration, the same are being heard together. We shall first discuss assessment year 2010- 11 and our observations for this year shall apply to assessment year 2011-12 as well.

Assessment year 2010-11

2. The Department has taken the following grounds of appeal:

“Ground No. l: The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs. 24,29,88,065/- made on adjustment in Arms length price of International Transaction contrary to the provisions stipulated in Section 92D and Rule 10.

Ground No.2: The Ld CIT(A) has erred in law and on facts in deleting the disallowance of Rs.13,46,45,288/- on depreciation claimed on leasehold rights over the land treating the same as intangible asset under sec. 32(l)(ii) of the Act.

Ground No.3: The Ld CIT(A) has erred in law and on facts in deleting the addition of interest of Rs.4,26,62,000/- (correct figure of addition of Rs.17,37,00,000/-) by treating it as ‘capital receipt.

Ground No. 4.: The Ld CIT(A) has erred in law and on facts in deleting the disallowance made u/s 14A r.w. Rule 8D of Rs.3,93,65,939/- and restricting it to Rs.46, 65,170/-.

Ground No.5: The Ld CIT(A) has erred in law and on facts in deleting the disallowance made on claim of excess depreciation ofRs.2,10,16,786/-.

Ground No.6: The Ld CIT(A) has erred in law and on facts in deleting the disallowance made on claim of travelling expenses to the extent of Rs. 63,02,960/- being 10% ofRs. 6,30,29,603/-.

On the fact and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit.

The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored to the above extent. The appellant craves, to leave, to amend or alter any ground or add a new ground which may be necessary.”

2.1 The assessee has taken the following grounds of appeal:

“1(A) On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming addition to the extent of Rs,5,10;53,900 from out of total addition of Rs.23,11,66,577 made by the Assessing Officer by way of adjustment in the Arm’s Length Price of international transactions as per the order of the Transfer Pricing Officer.

(B) On the facts and in the circumstances of the case, the learned CIT(A) erred in rejecting the contentions of the appellant that the advances to Associate Enterprises were in the nature of quasi equity and, therefore, no interest is chargeable/leviable.

2.(A.) On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance to the extent of Rs.92,66,513 out of total disallowance of Rs.1,02,58,819 made by the Assessing Officer from out of deduction claimed by the appellant-company u/s.35D of the IT. Act.

(B) Consequential to the aforesaid ground No.2(A), the learned C.I.T. (Appeals) ought to have directed the Assessing Officer to allow deduction for additional amount of Rs.4,14,26,832 u/s.35D instead of deduction of only Rs.3,79,63,604 considered and allowed by the learned C.I.T. (Appeals) in addition to deduction claimed in the return of income having regard to the additional claim made by the appellant-company before the Assessing Officer during the course of the assessment proceedings.

3. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance to the extent of Rs.29,29,718 out of the total disallowance of Rs.3,76,30,487 made by the Assessing Officer u/s. 14A of the IT. Act read with Rule-80 of the IT. Rules.

4. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of Rs.1,212 made by the Assessing Officer on the assumption that the appellant-company claimed excess depreciation @ 15% on certain assets on which according to the Assessing Officer depreciation @ 10% only was allowable.

5. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”

We shall first discuss the assessee’s grounds of appeal for assessment year 2010-11 and also the corresponding cross appeal of the Department with respect to that ground of appeal, wherever applicable:

3. Ground No. 1 of Assessee’s appeal: The learned CIT(A) erred in confirming addition to the extent of Rs,5,10;53,900 from out of total addition of Rs.23,1 1,66,577 made by the Assessing Officer by way of adjustment in the Arm’s Length Price of international transactions.

3.1 Ground No. 1 of Revenue’s appeal: The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs. 24,29,88,065/- made on adjustment in Arms length price of International Transaction contrary to the provisions stipulated in Section 92D and Rule 10.

4. The brief facts in relation to this ground of appeal are that during the relevant assessment year, the assessee M/s Adani Power Ltd has contributed a sum of ~ 1,35,42,00,000/- to M/s Adani Power Pte Ltd and a sum of ~ 2,89,30,91,520/- to M/s Adani Shipping Pte Ltd, both being Associated Enterprises of the assessee. The assessee was of the view that the sums advanced by the assessee company to its AEs were in the nature of quasi equity and the assessee company in its transfer pricing report also reported the aforesaid transactions as quasi equity. During the course of assessment, the TPO was of the view that the aforesaid amount advanced by the assessee company to its overseas AE’s were not in the nature of quasi capital but was in the nature of loan and the same was required to be benchmarked under section 92 of the Act. The TPO held that providing of loan by the assessee company to overseas AEs without charging any interest goes against the principal of arm’s-length price (A LP) since unrelated lenders do not provide interest free loans to independent unrelated Enterprises. Before the TPO, the assessee submitted that the AE’s mentioned above were incorporated with the capital that the assessee company advanced sums towards its equity obligations. M/s Adani Power Pte Ltd was incorporated with the object of investing in coal mines and also carry on the business of an investment holding company while M/s Adani Shipping Pte Ltd was incorporated with the object of carrying on business of chartering and owning of ships. Accordingly, by advancing the above amount, the assessee company would also be benefiting from such transaction. However, the TPO held that the nature of advances made by the assessee to the AE’s was in the nature of debt and had no character of equity funding. The AO accordingly held that the assessee should have charged interest at the rate of 5.3 8% which was the prime lending rate-PLR prevailing in Singapore. Accordingly, adjustment of ~ 23,11,66,577/- on account of interest charged on aforesaid impugned interest free loan for entire year was made.

5. In appeal before CIT, the assessee challenged the interest rate adjustment of ~ 5.38% and also the fact that this adjustment was made for the entire year under consideration and not the period for which the aforesaid sums were advanced. The Ld. CIT(Appeals) agreed with the assessee’s contention that there was business rationale of owning ships so as to ensure timely supply of coal for running the power plant. However, Ld. CIT(Appeals) concurred with the TPO’s finding that the above advances were in the nature of loan considering the fact that the assessee has itself characterised the same as loans in its audited financial statements. It is only when the question came to the benchmarking of the aforesaid advances, the assessee came out with the proposition that the loan may be treated as quasi capital in nature. Accordingly, Ld. CIT(Appeals) was of the view that aforesaid transaction had to be benchmarked in accordance with TP provisions. However, during the course of hearing, CIT required the assessee to modify the search process so as to make the search results more accurate. Further, Ld. CIT(Appeals) revised the benchmarking of interest at 2.48% per annum for M/s Adani Shipping Pte Ltd and 2.62% for M/s Adani Power Pte Ltd. This was on the basis that interest rate should be benchmarked to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency that are legal tender of the place or country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the central bank. However, interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent i.e. the rate of interest. In the instant case, since the loans have been made in USD and are also receivable in USD, in view of the Delhi High Court ruling in the case of CIT vs Cotton Naturals 55 taxmann.com 523, which has held that arm’s-length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which donor has to be repaid, which in the instant case is USD. Further, Ld. CIT(Appeals) also restricted the period of interest to the specific period for which loan was advanced by the assessee to the aforesaid AE’s and not for the entire year. Accordingly, Ld. CIT(Appeals) reduced the addition from ~ 23,11,66,577/- to ~ 5,10,53,900/-.

6. The Department is in appeal before us in respect of the above substantial relief granted by the Ld. CIT(Appeals) whereas the assessee is in appeal before us against the disallowance to the extent of ~ 5,10,53,900/- confirmed by Ld. CIT(Appeals).

7. Before us, the learned counsel for the assessee primarily reiterated the submissions made before Ld. CIT(Appeals) and the learned DR placed reliance on the observations made by the AO in the assessment order. We have heard the rival contentions and perused the material on record. In our considered view, we find no infirmity in the order of Ld. CIT(Appeals) so as to interfere with his findings. Firstly, the issue whether the said advance could be treated as quasi capital, we are of the considered view that Ld. CIT(Appeals) has observed correctly that in the instant set of facts, it is only when the assessee was confronted to benchmark the interest on the aforesaid advances made by the assessee towards AE’s, it came up with the alternate contention that the said amount could be treated as quasi capital. In the instant facts, as correctly noted by Ld. CIT(Appeals), there is nothing on record which could support the fact that the said advances by the assessee towards AEs were in the nature of quasi-capital. Both the TPO and Ld. CIT(Appeals) have made detailed observations on this aspect and we concur with the same. In the case of Kalpataru Power Transmission Ltd. [2022] 142 taxmann.com 428 (Ahmedabad – Trib.), the Ahmedabad ITAT has held that where advances were given by assessee to its AEs and no interest was charged on these advances contending that they were not loans but were quasi-capital in nature, since assessee was unable to substantiate same with evidence, advances were in nature of loans and transfer- pricing adjustment made by charging interest applying LIBOR was justified. In the case of Soma Textile & Industries Ltd. [2015] 59 taxmann.com 152 (Ahmedabad – Trib.), the Ahmedabad ITAT held that comparable uncontrolled price of quasi-capital loan, cannot be nil, unless it is only for a transitory period and de facto reward for said value of money is opportunity for capital investment or such other benefit. The ITAT made the following note-worthy observations:

• The expression ‘quasi-capital’ is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi-capital loans or advances, the comparison of the quasi-capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of ‘quasi-capital’, these cases referred to the situations in which (a) advances were made as capital could not be subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately.
• Clearly, the advances in such circumstances were materially different than the loan transactions simplicitor and that is what was decisive so far as determination of the arm’s length price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money advanced. [Para 9]
• On a conceptual note, several types of debts, particularly long­term unsecured debts, and revenue participation investments could be termed as quasi-capital. So far as arm’s length price of such transactions are concerned, this cannot be ‘nil’ because, under the comparable uncontrolled price method, such other transactions between the independent enterprises cannot be at ‘nil’ consideration either. Nobody would advance loan, in arm’s length situation, at a nil rate of interest. The comparable uncontrolled price of quasi-capital loan, unless it is only for a transitory period and the de facto reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. As for the intent of the assessee to treat this loan as investment, nothing turns on it either. Whether assessee wanted to treat this loan as an investment or not does not matter so far as determination of arm’s length price of this loan is concerned; what really matters is whether such a loan transaction would have taken place, in an arm’s length situation, without any interest being charged in respect of the same.
• As for the contention regarding crucial role being played by, or visualized for, this AE, there is no material on record to demonstrate the same or to justify that even in an arm’s length situation, a zero interest rate loan would have been justified to such an entity. A lot of emphasis has also been placed on the fact that the loan was out of the GDR funds, and, for this reason, the interest-free loan was justified. There is no logic in this explanation either. Even when the loan is given out of the GDR funds held abroad, the arm’s length price of the loan is to be ascertained. The source of funds is immaterial in the present context.

8. The next issue for consideration is that whether the interest rate has to be determined with reference to the PLR as prevalent in Singapore or the market determined interest rate applicable to the currency concerned in which the loan has to be repaid i.e. USD. In our considered view, Ld. CIT(Appeals) has not erred in facts and in law in holding that the ALP of the interest rate for the loan advanced to a foreign subsidiary should be computed based on the market determined rate applicable to the currency in which the loan has to be repaid i.e. USD. The High Court in the case of Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi) has held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. In the case of Assotech Moonshine Urban Developers (P.) Ltd. [2020] 121 taxmann.com 220 (Delhi – Trib.), the Delhi ITAT held that where assessee made payment towards interest on FCCDs denominated in Indian Rupee to its AE, interest should be market determined interest rate applicable to currency in which loan has to be repaid.

8.1 Further, we are also the considered view that Ld. CIT(Appeals) has not erred in facts and in law in restricting the computation of interest to the period for which the loans advanced by the assessee to its AEs.

9. In the result, ground number 1 of both the assessee’s appeal and department’s appeal is dismissed.

Ground number 2: confirming addition to the extent of ~ 92,66,513/- out of total disallowance of ~ 1,02,58,819/- out of deduction claimed under section 35D of the Act:

10. The brief facts related to this ground of appeal are that assessee claimed deduction under section 35D of the Act for ~ 11,09,22,665/- for share issue expenses incurred in connection with initial public offer (IPO). During the course of assessment, the AO contended that only specific expenditure incurred in connection with issue of shares for public subscription is allowable under section 35D of the Act. Accordingly, the AO reworked the expenditure not connected with public issue and made disallowance of ~ 92, 66, 513/-. In appeal before CIT, the assessee relied upon the decision of Ahmedabad ITAT in the case of CIT v. Amtrex Appliances Ltd. [2005] 94 TTJ 396 (Ahd.) and also on the case of CIT vs Shri Synthetics Ltd [1986] 162 ITR 819 (Madhya Pradesh), which held that use of word ‘being’ in section 35D is by way of illustration and is not restricted only to words “underwriting commission, brokerage are and charges for drafting, typing, printing and advertisement of propectus”. Therefore, expenditure incurred in connection with refund of oversubscription in relation to issue of shares would fall within provision of section 35D(2)(c)(iv) and would be allowable expenditure.

11. The Ld. CIT(Appeals) however partly allowed the assessee’ s appeal. CIT(Appeals) held that the sum of Rs. 9,92,306/- being expenditure incurred for stamping and registration fees in relation to shares issued to Lingo (Mauritius) Ltd were allowable expenditure under section 35D. However, with respect to the balance expenditure of ~ 92,66,553/-, CIT upheld the disallowance on the ground the assessee has not submitted any evidences to prove that expenditure disallowed by the AO falls within the list provided in section 35D of the Act.

12. The assessee is in appeal before us against the above disallowance confirmed by Ld. CIT(Appeals). While in principle, we are of the view that the term “being” u/s 35D means that the list is inclusive list and there is scope for expansion of the expenses to be considered is eligible deduction provided the same have been incurred for public issues expenditure. However, at the same time, we also agree with the view of Ld. CIT(Appeals) that the onus is on the assessee to prove expenditure falls within the ambit of section 35D of the Act and those items specified in s. 35D(2)(iv) of the Act. On a perusal of list of expenditure disallowed by AO and also confirmed by Ld. CIT(Appeals) viz vehicle hiring charges, travelling consultant, foreign travelling expenses, filing fees etc. the CIT has not erred in facts and in law in holding that the onus is on the assessee to prove that the above expenses have been incurred in connection with share subscription. The onus is on the assessee to substantiate that the expenses are connection with share subscription, which onus, as correctly pointed out by Ld. CIT(Appeals) has not been discharged in the instant facts.

12.1 In the instant facts, while we are of the view that definition under section 35D is inclusive, however, the scope thereof is not unrestricted and the assessee is under obligation to prove that the expenses incurred are directly/indirectly connected with share subscription/issue expenses so as to be eligible for deduction under section 35D of the Act. In absence of the assessee producing any evidence to the above effect, Ld. CIT(Appeals) has not erred in facts and in law in confirming the disallowance of the above expenses. Accordingly, this issue is restored to the file of Ld. A.O. to verify how the above expenses are in relation to share subscription/issue expenses along with supporting documentary evidences and relief may be allowed after carrying out necessary verification.

13. In the result, ground number 2 of the assessee’s appeal is allowed for statistical purposes.

Ground No. 3: Ld. CIT(Appeals) erred in confirming addition of Rs. 29,29,718/- from total addition of ~ 3,76,30,487/- u/s 14A of the Act

The Department has also filed appeal on this ground (ground number 4) to the effect that Ld. CIT(Appeals) erred in deleting disallowance under section 14A of ~ 3,93,65,939/- and restricting the same ~ 46,65,170/-

14. The brief facts in relation to this ground of appeal are that during the course of assessment, the assessing Officer observed that assessee has earned dividend income to the tune of ~ 6,29,94,006/- which is exempt from Further, the investments of the assessee increased from ~ 272,14,36,000/- as on 31-03-2009 to 746,58,06,000/- as at 31-03-2010. Accordingly, the AO made total disallowance of 3,93,65,939/- u/s 14A of the Act.

15. In appeal, Ld. CIT(Appeals) gave substantial relief to the assessee and restricted the addition to 46,65,170/-. So far as the addition in relation to interest expenses disallowance was concerned, the Ld. CIT(Appeals) held that assessee has not established investments are not made from borrowed funds and accordingly part of the interest expenses was required to However, for the purpose of interest disallowance, Ld. CIT(Appeals) reduced from the same, interest on letter of credit of 4,10,66,000/- (since the same had a specific use) and also reduced from the interest expenditure the interest income earned by the assessee during the year under consideration ( 25,85,91,432/-) and further adopted the average total assets at 123,23,29,58,972/- and accordingly computed the interest expense disallowance at 29,29,718/- for the purpose of disallowance under section 14A of the Act. While, Ld. CIT(Appeals) gave complete interest in respect of administrative expenses incurred for earning such interest income, however, since the assessee itself had offered a sum of 17,35,452/- while computing administrative expenses, the total disallowance under section 14A of the Act was confirmed at 46,65,170/- ( 29,29,178/- towards interest disallowance and 17,35,452 towards administrative expenses).

16. The assessee is in appeal before us against the interest disallowance of 29,29,718/- under section 14A of the Act. The Department is in appeal before us against the restricting of aforesaid disallowance under section 14A of the Act to ~ 46,65,170/- only from ~ 3,93,65,939/-. The counsel for the assessee submitted that Ld. CIT(Appeals) erred in facts and in law computing the interest expense disallowance at ~ 29,29,718/- for the purpose of disallowance under section 14A of the Act since the assessee had substantial interest-free funds at its disposal. The counsel for the assessee submitted that as per the balance sheet as on 31 March 2010, the funds available with the company increased from ~ 2293 crores to ~ 5778 crores and therefore, the assessee had substantial interest-free funds at its disposal. Accordingly, in view of the large number of decisions on the issue that once the assessee had substantial interest-free funds at its disposal, the presumption is that the assessee’s own interest-free funds have been utilised for making investments yielding exempt income. The learned DR has relied upon the observations made by AO in the assessment order.

17. We have heard the rival contentions and perused the material on record. So far as the interest disallowance on account of use of borrowed funds is concerned, we are in agreement with the counsel for the assessee that once it is established that the assessee is having substantial interest-free funds at its disposal, the presumption would be that the assessee’ s own interest-free funds have been utilised for making the investments yielding exempt income. The Gujarat High Court in numerous decisions has consistently taken the position that if interest-free funds available with the assessee exceed the investments made in funds yielding exempt income, then no disallowance is called for under section 14A of the Act. In the case of Hitachi Home and Life Solutions (I) Ltd.[2014] 41 taxmann.com 540 (Gujarat), the Gujarat High Court held that where assessee’s interest free funds exceeded investment made for earning exempted dividend income, disallowance under section 14A was not justified. Again, in the case of UTI Bank Ltd[2018] 99 taxmann.com 392 (Gujarat), the Gujarat High Court held that no disallowance could be made under section 14A where assessee’s interest-free funds far exceeded its interest-free investments. In the case of Gujarat Narmada Valley Fertilizers Co. Ltd[2014] 42 taxmann.com 270 (Gujarat), the Gujarat High Court held that where assessee-company received dividend on UTI and shares and investment in same was made in earlier years and interest free funds available with assessee were much larger as compared to investment, disallowance of assessee’s claim for interest expenditure by applying section 14A was incorrect. In case of Gujarat Fluorochemicals Ltd.[2020] 120 taxmann.com 433 (Gujarat), the Gujarat High Court again reiterated that where interest free funds available with assessee were far more than gross investment, it could safely be harboured that interest bearing funds was not invested by assessee and, thus, no disallowance under section 14A to be made. In view of the consistent position taken by the Gujarat High Court, as applied to the facts instant case, in our considered view, no disallowance is called for in respect of interest expenses under section 14A of the Act, when the assessee is having sufficient interest-free funds at its disposal in excess of investment made in instruments yielding exempt income.

17.1 So far as disallowance of administrative expenses concerned, we observe that the assessee has itself made a suo moto disallowance of Rs. 17,36,452/- toward salary expenditure for earning of such exempt income.

The Ld. CIT(A) gave complete relief with regards to disallowance on account of administrative expenditure on the ground that the assessee had made strategic investment which was not with a view to earn dividend income and hence Ld. CIT(A) deleted the entire addition on account of administrative expenses. The Ld. D.R. has challenged the granting of relief by the CIT(A) in respect of administrative expenses on the ground that the assessee has made strategic investment. In our considered view, Ld. CIT(Appeals) has erred in facts and in law in deleting the entire administrative expenses only on the basis that the assessee had made strategic investments in subsidiary companies for expansion of business and not for earning exempt dividend income. The SC in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC) held that the expression ‘in relation to’ appearing in section 14A is synonymous with ‘in connection with’ or ‘pertaining to’, and, that the provisions of section 14A apply regardless of the intention/ motive behind making the investment.

17.2 In the case of Indian Farmers Fertiliser Cooperative Ltd. v. Asstt. CIT [2018] 52 CCH 282 (Delhi – Trib.),the ITAT Delhi Bench rejected the assessee’s argument that strategic investments made in domestic companies should be excluded while determining the amount to be disallowed under section 14A read with Rule 8D(2), following the decision of the Supreme Court in the case of Maxopp Investments Ltd. (supra) wherein it was held that under 14A of the Act, dominant purpose for which investment in shares was made by the assessee was not relevant. With respect to the assessee’s claim of excluding the interest not attributable to earning exempt income while computing disallowable under Rule 8D, the Tribunal observed that the financial statements did not have bifurcations of interest in Profit & Loss Account and it was very difficult to bifurcate interest expenditure that was attributable to earning of exempt income. It thus remitted the matter back to the file of the Assessing Officer directing the assessee to file all relevant details in order to establish its claim regarding interest expenditure not attributable to earning of dividend income. The ITAT Mumbai Bench in the case of Welspun India Ltd. v. Dy. CIT [2019] 104 taxmann.com 267 (Mum. – Trib.) did not agree with the contention of the assessee that “the strategic investments made with group/associated companies etc cannot be excluded while computing disallowance under 14A of the Act by following the decision of the Supreme Court in the case of Maxopp Investment Ltd. (supra).

17.3 In the instant facts, we observe that Ld. CIT(Appeals) has allowed complete relief to the assessee in respect of administrative expenses on the ground that no disallowance is called for since the assessee has made strategic investments into subsidiary companies, which was not with a view to earn exempt income. In our considered view, Ld. CIT(Appeals) has erred in facts and in law in completely allowing administrative expenses only on the ground that the assessee has made strategic investment not with a view to earn dividend income and accordingly the matter is being restored to the file of the AO to verify the correctness of the basis of disallowance made by the assessee with respect to administrative expenses and make any adjustments thereto, in accordance with law.

18. In the result, the appeal of the assessee as well as of the Department is partly allowed in respect of the above ground of appeal.

Ground number 4: Ld. CIT(Appeals) erred in confirming the disallowance of ~ 1,212/- made for claim of excess depreciation @15% instead of 10%:

19. The brief facts in relation to this ground of appeal are that the AO contended that assessee made addition in electrical fittings for ~ 24,230/- and on such fittings assessee is entitled to depreciation @10% as against 15% claimed by the assessee and hence the AO made disallowance of excess depreciation for ~ 1212/-. In appeal, Ld. CIT(Appeals) dismissed the assessee’s appeal on the ground that the assessee has not given exact details to prove its contention.

20. Before us, the counsel for the assessee submitted that the AO in the assessment order has itself admitted that the assessee has made addition in electrical fittings and therefore Ld. CIT(Appeals) has erred on facts in observing that assessee has not given exact details of addition to prove its contention that such addition is part of electrical installation, when the AO itself has not disputed the same as is evident from page 170 of the Ld. CIT(Appeals) order. Further, the counsel for the assessee placed reliance on the case of Cera Sanitaryware Ltd. [2016] 68 taxmann.com 433 (Ahmedabad – Trib.), which has held if electrical fittings, fans etc., are integral part of plant or machinery, depreciation is to be allowed at same rate which is applicable to plant and machinery. In response, DR has placed reliance on the observations made by the AO and Ld. CIT(Appeals) in the orders.

21. We have heard the rival contentions and perused the material on record. We are in agreement with the contention of the counsel for the assessee that the AO has itself observed that the assessee has made addition in electrical fittings of ~ 24, 230/- on which it claimed depreciation @ 15%. Accordingly, when this fact has not been disputed by the AO, Ld. CIT(Appeals) has erred in facts and in holding that assessee has not given exact details of addition. On the allowability of the rate of depreciation, we observe that the issue is covered in favour of the assessee in the case of Cera Sanitaryware Ltd. [2016] 68 taxmann.com 433 (Ahmedabad – Trib.), which has held that if electrical fittings, fans etc., are integral part of plant or machinery, depreciation is to be allowed at same rate which is applicable to plant and machinery. Further, ITAT Ahmedabad in the case of Century Tiles Ltd. [2014] 51 taxmann.com 515 (Ahmedabad – Trib.) held that Electric installations that were part of plant and machinery, are eligible to depreciation as plant and machinery.

21.1 In view of the above observations, ground number 4 of the assessee’ s appeal is allowed.

We shall not take up Departments grounds of appeal for assessment year 2010-11

Ground Number 1: Ld. CIT(Appeals) erred in deleting addition of ~  24,29,88, 065/- made adjustment in ALP of an international transaction

22. This ground of appeal has already been adjudicated while discussing ground of appeal number 1 of the assessee’s appeal.

Ground number 2: Ld. CIT(Appeals) for erred in deleting disallowance of depreciation of ~ 13,46,45,288/- on leasehold rights of the land treating the same as intangible asset

23. The brief facts of the case are that that the assessee got approval from the Government of India as developer of setting up of a sector specific special economic zone for power sector for supply of power to SEZs and for that purpose the assessee obtained two plots on lease from Adani Ports and Special Economic Zone Ltd. for a period of 25 years and 15 years respectively. For obtaining the aforesaid plots on lease, the assessee had to pay upfront lease charges as well as nominal lease rent annually. The assessee amortised the lease premium so paid over the period of lease since benefits from the said lease premium for the aforesaid 2 plots of land will flow over the lease period. The assessee’s case was that after the lease period, the aforesaid plots of land were to be returned back to the owner and therefore during the lease period, the assessee should be allowed to amortise the lease rent over the period of lease. In the alternative, the assessee submitted that entire lease premium may be allowed as revenue deduction in the year of payment itself. The AO disallowed the lease premium amortised by the assessee during the year under consideration relying upon the Pune

ITAT decision the case of Dribits v. DCIT 142 TTJ 86 on the ground that leasehold rights and the land are not entitled to depreciation.

24. In appeal, Ld. CIT(Appeals) allowed the appeal of the assessee on the ground that the Gujarat High Court in the case of DCIT v. Sun Pharmaceuticals India Ltd. 329 ITR 476 held that lease premium paid by the assessee is in the nature of advance rent and is required to be allowed as revenue expenditure in the year of payment itself. Further, the Ahmedabad ITAT in the case of General Motors v. DCIT 146 ITD 559 also allowed the claim of the assessee on similar facts. The Ld. CIT(Appeals) made the following observations while allowing the appeal of the assessee:

“On careful consideration of both the decisions of Jurisdictional High court and Ahmedabad ITAT, it is observed that Hon ‘ble High court has held that lease premium paid by assesses is in nature of advance rent and is required to be allowed as revenue expenditure whereas Hon ‘ble Ahmedabad ITAT has allowed the claim of amortisation of lease premium over lease period following the decision of Hon ‘ble Gujarat High court referred supra. If is pertinent to note that similar claim of amortisation of lease premium of land in appellant’s group case being Adani gas Limited was allowed by CIT(A) III vide his order dated 1 2/1 2/2013 for A V 2009-10, CIT(A) – I vide his order dated 15/05/2015 for A.V. 2010-11 and vide his order dated 15/07/2015 for A. V. 2011-12. As facts of appellant’s case are similar to facts discussed by Hon’ble Ahmedabad ITAT being binding decision. claim of appellant regarding amortisation of lease premium for Rs. 13,46,45,288 is allowed. This ground of appeal is allowed.”

25. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) allowed the claim of the assessee. The DR relied upon the observations made by the AO in the assessment order and submitted that the assessee cannot claim depreciation/amortisation respect of lease charges. In response, the counsel for the assessee placed reliance on the observations made by Ld. CIT(Appeals) in the appellate order is placed reliance on the case of Sun Pharmaceuticals 329 ITR 479 (Gujarat). In the alternative, the counsel for the assessee submitted that the entire lease premium charges should be allowed as revenue expenditure in the year of payment itself.

26. We have heard the rival contentions and perused the material on record. We are in agreement with the observations made by Ld. CIT(Appeals) in the appellate order. The Gujarat High Court in the case of Sun Pharmaceuticals 329 ITR 479 (Gujarat)held that where assessee took a land on lease for 99 years at a nominal rent of Rs. 40 per year and paid a sum of above Rs. 48 lakhs as advance rent, as land was not acquired by assessee, advance rent was allowable as revenue expenditure and could not be treated as capital expenditure. Again, Gujarat High Court in the case of Mahavir Inductomelt (P.) Ltd.[2017] 88 taxmann.com 562 (Gujarat)held that amount of premium paid by assessee with respect to plot allotted by Gujarat Maritime Board to it on lease of ten years would be allowable as revenue expenditure in its business of ship breaking. In the case of Delhi International Airport (P.) Ltd[2018] 89 taxmann.com 326 (Delhi – Trib.), the ITAT held that one time payment of upfront fee for acquiring right to operate and maintain airport for 30 years, cannot be reckoned for purpose of acquisition of business, but it could be reckoned as lease premium or licence fee and had to be treated as revenue expenditure. In the case of United Phosphorus Ltd.[2015] 56 taxmann.com 354 (Gujarat), the High Court held that premium paid for leasehold land is allowable as revenue expenditure. In view of the consistent position taken by various Courts including the Gujarat High Court, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in allowing this Ground of Appeal of the assessee.

27. In the result, Ground Number 2 of the Department’s appeal is dismissed.

Ground Number 3: Ld. CIT(Appeals) erred in deleting addition of interest income of ~ 4,26,62,000/-by treating the same as capital receipt

28. The brief facts in relation to this ground of appeal are that the assessee is engaged in the business of setting up of power projects and has incurred capital expenditure for such set up and such expenditure has been classified as “project development expenditure” income earned in the form of interest income, scrap income, gain on sale of securities during pre-commencement of projects is reduced from expenditure under such head. During the year under consideration, the assessee earned interest income of ~ 44 crores from various fixed deposits placed as margin money for opening letter of credit facilities. The deposits were placed in state power utility companies to bid for supply of power out of the said ~ 22.44 crores, interest income of ~ 14.55 crores was reduced from project development expenditure as it related to units which are yet to commence operations and the remaining amount of ~ 7.86 crores was capitalised by the assessee and reduced from the block Officer is which have commenced commercial operations during the year under consideration. The AO has not disputed the figure of ~ 7.88 crores as reduced from the block of assets and the dispute was raised by the AO with respect to taxability of interest income of ~ 14.55 crores. Before Ld. CIT(Appeals), the assessee contended that it had earned the above interest income on fixed deposits parked as margin money in connection with tenders floated by various state electricity utility companies viz. Gujarat Urja Vikas Nigam Ltd and Maharashtra State electricity development Corporation Ltd along with interest income on fixed deposits parked as margin money in connection with opening of letter of credit in favour of foreign venders for purchase of machinery for the power generating units which are under implementation stage. This case of the assessee was that various fixed deposits were part for specific purposes which were inextricably linked in the project development phase. The fixed deposits were parked as margin money in connection with bid bonds/tenders floated by various state electricity utility companies. As per the terms of the said bid bonds/tenders, the company was required to park fixed deposits with banks which in turn issued bank guarantee/performance guarantee to the said state electricity utility companies. This being the precondition for bids/tenders floated by the state electricity utility companies for the purpose of sale of electricity on long-term basis to said companies, the assessee parked fixed deposits with banks as margin money and in this process has earned interest income thereon. The Ld. CIT(Appeals) observed that on identical facts the Ahmedabad ITAT in the assessee’s own case for assessment year 2008-09 deleted the addition (order dated 27-07-2015 in ITA number 2755/Ahd/201 1). Accordingly, the Ld. CIT(Appeals) allowed the assessee’s appeal on this ground in view of the ITAT order referred to above. While allowing the appeal of the assessee, Ld. CIT(Appeals) made the following observations:

“It can be seen from above referred order of Hon’ble Ahmedabad ITAT in appellants own case that interest income earned from fixed deposits kept for PPA, fixed deposits with Margin money, Interest on ICDs interest income on securities and general purpose of investments have been taxed as capital receipt. It is pertinent to note that appellant has offered interest income from ICD, securities and general purpose of investments and claimed as capital receipt by raising additional ground and even the said plea was accepted by Hon’ble Ahmedabad ITAT. The Hon’ble ITAT has considered various decisions of Hon’ble Supreme court and other High courts including decision of Turticorin Alkali Chemicals Fertilizers Limited relied upon by Assessing Officer in present case and held that interest income relating to project under development phase is required to be taxed as capital receipt and not as income from other sources. Considering the entire facts discussed herein above_, interest income earned during the year under consideration for Rs 14.55 crore is taxed as capital receipt and addition made by Assessing Officer is deleted.”

29. Before us, the DR placed reliance upon the observations made by the AO in the assessment order. In response, counsel for the assessee submitted that the case of the assessee is covered by the decision of the Ahmedabad ITAT in assessee’s own case for assessment year 2008-09 referred to above.

30. We have heard the rival contentions and perused the material on In our view, Ld. CIT(Appeals) has not erred in facts and in law in holding that the interest income is inextricably linked to generation of power. Accordingly, the same was correctly held to qualify as ‘Capital Receipts’ and not taxable as ‘Income from Other Sources’ in the hands of the assessee. In the above case Adani Power Ltd.[2015] 61 taxmann.com 355 (Ahmedabad – Trib.), the brief facts were that the assessee company was engaged in business of developing, operating, maintenance of power projects and sale of power. During year under consideration, assessee­company’s projects were under implementation and if had not started any commercial activities. The assessee earned certain interest income on surplus funds deposited in Government securities. The Ahmedabad ITAT after taking into consideration the decisions of Bokaro Steel and Tuticorin Alkali held that since interest received related to period prior to commencement of business, it was in nature of capital receipt and was required to be set off against pre-operative expenses. The ITAT observed as below:

Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business, it was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses.

That, the ratio of the above finding of the Hon ‘ble Delhi High Court would be squarely applicable to the facts of the assessee ‘s case, because admittedly in the case under appeal before us the share  capital as well as loans were raised for the specific purpose of  setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has  already set off the interest income against the pre-operative  expenses which is titled as “project development expenditure“. In view of above, we are of the opinion that the interest income of Rs.1,35,87,158/- as well as Rs.7,91,51,306/- was a capital receipt not chargeable to tax during the year under consideration.

30.1 Again, the Kolkata Tribunal in the case of Kolkata Metro Rail Corpn. Ltd. [2019] 102 taxmann.com 419 (Kolkata – Trib.), held that where money given by Government to assessee-joint venture company of Central and State Government for implementation of construction work of metro railway was kept in fixed deposit with a bank before utilisation, interest income earned could not be taxed as income from other sources in hands of assessee. While passing the ruling, the Tribunal made the following observations:

We note that the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 1 72/93 Taxman 502, is that if funds have been borrowed for setting up of a plant and if the funds are ‘surplus’ and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “Income from other sources’. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra), is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise ‘inextricably linked’ to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. The test, therefore, is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section, income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 of the Act, in Chapter IV of the Act. For an income to be classified as income under the head “Profits and gains of business or profession” it would have to be an activity which is in some manner or form connected with business. The word “business” is of wide import which would also include all such activities which coalesce into setting up of the business. We take support of these propositions from the judgments of Hon`ble Supreme Court in the case of Mazagaon Dock Ltd. v. Commissioner of Income tax and Excess Profit tax [1958] 34 ITR 368 and Narain Swadeshi Wev. Mills v. CEPT [1954] 26 ITR 765 (SC). Once it is held that the assessee ‘s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT (A)  that the monies which were inducted into the joint venture company  by the joint venture partners were primarily infused to purchase  land and to develop infrastructure then it cannot be held that the  income derived by parking the funds temporarily with Bank, will result in the character of the funds being changed, in as much as  the interest earned from the bank would have a huge difference  than that of business and be brought to tax under the head ‘Income  from other sources’. It is well-settled that an income received by the assessee can be taxed under the head “Income from other sources” only if it does not fall under any other head of income as provided in section 14 of the Act. The head “Income from other sources” is a residuary head of income. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) it was found by the authorities that the funds available with the assessee in that case were ‘surplus’ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as ‘income from other sources’. On the other hand in Bokaro Steel Ltd. ‘s case (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be ‘inextricably linked’ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses.

The very purpose of constitution of the Assessee was to act as a  Special Purpose Vehicle (SPV) created by the Govt of India and Govt. of West Bengal in the form of Joint Venture with equal equity participation for implementation of rapid transport infrastructure in Kolkata. Both the Central and the State Governments are to provide requisite finances for implementation of the said project. The funds from the Central and State Governments flow directly to the Assessee company as equity and Subordinate Debt/Loans. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the Assessee is a SPV formed by the Government of India and Government of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the Assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines.

30.2 In the case of Bangalore Metro Rail Corpn. Ltd.[2022] 135 taxmann.com 268 (Karnataka), the Karnataka High Court held that where out of funds granted by State Government to assessee-Government company for implementation of a rail-based Mass rapid Transit System, unutilized funds of project were invested by assessee in fixed deposits and mutual funds as per directions of Government, since interest accrued therefrom had to be utilized only for purpose of scheme, it could not be counted as income of assessee and could not be considered as revenue receipts.

30.3 The Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 181 Taxman 249/315 ITR 255 (Delhi) wherein the Hon’ble Delhi High Court have held as under:

“5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals (supra) is that if funds have been borrowed for setting up of a plant and if the funds are surplus and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “income from other sources. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise inextricably linked to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses.

5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses.

30.4 In view of the above discussion, since in the instant facts, the funds were parked by way of fixed deposits as a precondition for obtaining bids/tenders, the interest income had a direct nexus the project of the assessee and accordingly, such interest income was taxable as “income from other sources” in the hands of the assessee.

31 In the result, ground number 3 of the Department’s appeal is dismissed.

Ground number 4: Ld. CIT(Appeals) erred in deleting disallowance made under section 14A of the Act of ~ 3, 93, 65, 939/-and restricting the same ~ 46,65, 170/-

32. Since we have dealt with this ground in the preceding part of the order, while dealing with the appeal of the assessee, our observations/conclusion therein would apply the case of assessee as well.

33. In the result, ground number 4 of the Department’s appeal is partly allowed.

Ground Number 5: Ld. CIT(Appeals) erred in deleting disallowance of claim of excess depreciation of ~ 2,10,16,786/-

34. The brief facts related to this ground of appeal are that during the pre-construction period, the assessee company used certain fixed assets viz. cranes, trucks and other plant and machinery for constructing power generating units. These power generating units have commenced operations during the year under consideration. The cost of the said power generating units have been increased by the assessee by allocating the depreciation on cranes, trucks and other plant and machinery which were used for constructing the said power generating units. The AO disallowed this claim of depreciation of the assessee on cranes, trucks and other plant and machinery related to the pre-commencement period which had been allocated to the cost of power generating units, which had commenced commercial production during the year under consideration, amounting to ~ 2,10,16,786/-.

35. In appeal, Ld. CIT(Appeals) allowed the assessee’ s appeal on this ground, with the following observations:

“The Hon’ble Madras High court in the case of CIT Vs Sabri Mills (p) limited 109 ITR 451 has held that preproduction expenses incurred in connection with bringing actual assets into existence and to put them in working condition have to be included in actual cost of assets for granting depreciation allowance and development rebate. The Hon’ble Gujarat High court in the case of Glass Line Equipments Co Ltd Vs CIT 253 ITR 454 has held as under :

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….

in the present case, appellant has computed depreciation on assets used during re-commencement of business operation and such depreciation is considered as part of project development expenditure to be allocated to various fixed constructed by appellant and such depreciation is not claimed as revenue expenditure in earlier years. Considering these facts and decision of Hon’ble Gujarat High court and Hon’ble Mumbai ITAT referred supra, it is held that if certain assets are used in pre-operative period to assist the setting up of plant and machinery, then depreciation on such “assisting assets” is rightly part of p re-operative expenses like any other direct or indirect cost and appellant is entitled to claim depreciation on cost of new assets including depreciation capitalized to such new assets as part of cost. In nutshell, the disallowance of depreciation made by the Assessing Officer for Rs. 2,10,16,786/- is deleted. This ground of appeal is allowed.”

36. The Department is in appeal before us against the order passed by Ld. CIT(Appeals) deleting the disallowance referred to above. We observe that in the case of Sabari Mills (P.) Ltd[1977] 109ITR451 (Madras), the High Court held that pre-production expenses incurred in connection with bringing actual assets into existence and to put them in working condition have to be included in actual cost of assets for granting depreciation allowance and development rebate. The Mumbai ITAT in the case of Gujarat Ambuja Cements Ltd.[2005] 4SOT59 (Mum.), the assessee started commercial production since October 1986. Prior to this, assessee charged depreciation on some fixed assets, which were put to use before start of commercial production. The Assessee capitalized pre-operative expenses including depreciation on such assets in accordance with accounting practices of ICAI. The ITAT held that once pre-operative expenses having direct or indirect nexus with setting up of business or installation of machinery can be capitalized, then there is no reason why they are not entitled to depreciation as per Rules. The ITAT held that assessee was entitled to depreciation as per rules on capitalized value of pre-operative expenses including depreciation charged on assets used in pre-operative period. In the case of Glass Lines Equipments Co. Ltd.[2001] 119 TAXMAN 813 (GUJ.), the High Court held that as regards depreciation, capitalisation of depreciation is impermissible if assessee has claimed amount of depreciation on revenue account. In the event of the assessee having not claimed amount of depreciation relatable to assets of the office on revenue account, the assessee would be permitted to capitalise the same.

37. In the instant facts, Ld. CIT(Appeals) has a specific finding that the assessee has not claimed the above depreciation as revenue expenditure in any of the earlier years. Accordingly, in view of the above rulings, including that of the jurisdiction Gujarat High Court, we are of the considered view that the assessee is eligible to capitalize the depreciation on cranes, trucks and other plant and machinery which were used to bring the power generating units into existence, during the pre-commencement period by adding the same to the cost of such power generating units. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) while allowing the assessee’s ground of appeal on this issue.

38. In the result, ground number 5 of the Department’s appeal is dismissed.

Ground Number 6: Ld. CIT(Appeals) erred in deleting disallowance of travelling expense to the extent of ~ 63,02,960/- being 10% of ~  6,30,29,603/-

39. The brief facts in relation to this ground of appeal that the AO observed that the assessee has travelled by Karnavati Aviation Ltd and incurred total expenses of ~ 6,30,29,603/- and the AO disallowed 10% of the above travelling expenses on the ground that personal element cannot be ruled out.

40. In appeal, Ld. CIT(Appeals) allowed the assessee’s appeal on the ground that assessee has given complete trip -wise details of travel done by the assessee and his employees and the AO has not found any infirmity in the details furnished by the assessee. Accordingly, Ld. CIT(Appeals) allowed the assessee’s appeal with the following observations:

“9.3 I have carefully considered the assessment order and submission filed by appellant. The Assessing Officer has observed that appellant has travelled by Karnavati Aviation limited and incurred total expenditure of Rs 6,30,29,603!- and as personal element cannot be ruled out, he made disallowance of Rs 83,02,960!- being 10% of such expenditure. On the other hand, appellant has reiterated submission made during the course of assessment proceedings and contended that appellant company hired the aircraft from time to time mainly for the purpose of commutation of employees and directors of the assessee company from Ahmedabad to Mundra and vice versa as the power plant of the assesses is located in Mundra. Further, the Air craft is used by the executives and company official travelling from Ahmedabad to Bombay and Delhi for the purposes of business meetings with vendors, customers, Banks and Financial Institutions for the business of the assessee company. On these basis, it was argued that when complete details were made available with Assassins Officer. Assessing Officer was not justified in making disallowance treating 10% of expenditure as personal in nature.

On careful consideration of entire facts, it is observed that during the course of assessment proceedings, appellant has given complete details of travelling payments made to Karnavati Aviation along with purpose of expenditure, bills raised by party etc and same are not found to be incorrect. Even, appellant has submitted trip wise details of aircraft used by executives, employees and directors of appellant company along with date, route and name of person, who travelled in the aircraft for the month of August, 2009 and no specific discrepancy was pointed out by Assessing Officer. The Assessing Officer has proceeded to make adhoc disallowance on presumption that personal usage cannot be denied but this observation of Assessing Officer cannot be sustained in view of specific details submitted by appellant and same are not found to be incorrect. The Hon’ble Gujarat High court in the case of Sayaji Iron & Engg. Co Vs CIT 253 ITR 749 has held as under :

Section 37(1) of the income-tax Act, 1961 , read with Sections 198 and 309 of the Companies Act, 1956 – Business expenditure – Allowability of assessment year 1979 -80 – Whether when vehicles belonging to an assessee-company are used by its directors, for personal or other purposes, it would be wrong to hold that vehicles are personally used by company, because a limited company by its very nature cannot have any personal use- Held, yes- whether once expenditure on cars in question is in terms as provide in sections 309 and 198 of the Companies Act, 1956 there cannot be any non business purpose insofar as assessee company is concerned-Held yes-whether, therefore no disallowance of car expense can be made in hands of assessee –company on account of personal use of cars by directors-Held, yes”

It is further observed that ld CIT(A) I in group concern ‘s case of Adani Enterpr.se Ltd. (Appeal order CIT(A)-VI/Add.CIT.Cir-1/235/2014-15 dated 5th June 2015) has deleted similar disallowance made by Assessing Officer. Considering the facts discussed herein above and following the decision of Hon’ble Gujarat High court referred supra, disallowance of Rs 63,02,960!- made by Assessing Officer is deleted. This ground of appeal is allowed.”

41. The Department is in appeal before us against the order passed Ld. CIT(Appeals) deleting the disallowance made by the AO. From the facts placed before us, we find no factual infirmity in the order of Ld. CIT(Appeals), who after making a detailed factual analysis, has in our considered view, correctly allowed the assessee’s appeal in the present set of Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) with respect to this ground of appeal so as to call any interference.

42. In the result, ground number 6 of the Department’s appeal is

Assessment year 2011-12

43. The Department has taken the following grounds of appeal:

“(1) That the ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 13,54_,99_,305!- made u!s 92 CA (3) of the Act.

(2) That the ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 23,23_,742!- made u!s 35D of the Act on account of share issue expenses.

(3) That the ld. CIT(A) erred in law on facts in deleting the addition of 10,79,33,090!- made on account of disallowance of depreciation of lease hold land.

(4) That the ld. CIT(A) erred in law and on facts in deleting the addition of 9,23 _,64_,116!- made on account of disallowance u!s 14A r.w.r 8D of the Act.

(5) That the ld. CIT(A) erred in law and on facts in deleting the addition of 1,78,64,268!- made on account of disallowance of excess depreciation claim.

(6) That the ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 99,90,000!- made on account of disallowance of Travelling expenses.

On the fact and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income!book profit.

The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored to the above extent. The appellant craves, to leave, to amend or alter any ground or add a new ground which may be necessary.”

43.1 The assessee has taken the following grounds of appeal:

“1. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in refusing to adjudicate upon Ground No. 1 of the appellant’s appeal before him challenging the validity of the assessment order impugned before him, on the ground that it was general in nature.

2. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in sustaining an addition of Rs.8,80,90,780 out of the addition of Rs.22,35,90,085 made by the learned Assessing Officer as directed by the learned Transfer Pricing Officer (TPO for short) vide his order u!s. 92CA(3), on account of interest which, in the view of the learned TPO, the appellant ought to have charged from its wholly owned subsidiaries on the interest free loans provided by it to them, when the entire addition deserved to be deleted.

3. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in sustaining an addition of Rs. 92,66,513 (out of Rs.1,15,90,255 disallowed by the learned Assessing Officer) u/s. 35D when the entire disallowance deserved to be deleted.

4. In law and in the facts and circumstances of the appellant’s case, the learned C1T(A) has grossly erred in upholding the addition of Rs.54,59,419 made by the learned Assessing Officer to the appellant’s returned income on the ground that interest income to that extent actually set off by the appellant against expenditure during the construction period pending capitalization, was not capital in nature.

5.1 In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in failing to appreciate that the learned Assessing Officer had made an addition of Rs.10,10,83,248 to the appellant’s returned income u/s. 14A even though it was not open to him to assume jurisdiction under that provision in the peculiar facts and circumstances of the appellant’s case. He ought accordingly to have ordered for the deletion of the entire addition of Rs.10,10,83,248 as having been made without jurisdiction instead of partly sustaining it to the extent ofRs.39,99,116.

5.2 Without prejudice to the foregoing, in law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in sustaining an addition of Rs.39,99,116 (out of Rs.10,10,83,248 made by the learned Assessing Officer u/s. 14A after adjusting suo motu disallowance of Rs.23,60,008 made by the appellant) when no addition whatsoever was warranted or justified u/s. 14A beyond Rs.23,60,008 suo motu disallowed by the appellant out of its administrative expenses.

6.1 In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in upholding the disallowance of depreciation of Rs.61,871 made by the learned Assessing Officer on the ground that the concerned assets were eligible to depreciation @10% applicable to ‘Furniture and fittings’ instead of @15% claimed by the appellant on the ground that being items of electrical installation pertaining to supply of power to plant and machinery, they fell in the block of assets of ‘Machinery and plant’ eligible to depreciation @ 15%.

6.2 Without prejudice to the foregoing, in law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in failing direct the learned Assessing Officer to recompute the quantum of the disallowance after taking into account higher WDV of the concerned items after considering similar disallowance made in the earlier assessment year/s.

7. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in dismissing Ground No. 13 of the appellant’s appeal before him challenging the initiation of penalty proceedings u/s. 271 (1)(c), as premature. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the appellant’s case, there being absolutely no warrant/justification for initiating the penalty proceedings, they deserved to be dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation.

8. The 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.”

44. The counsel for the assessee submitted that he shall not be pressing for ground number 1 of his appeal challenging the validity of assessment, and accordingly, the same is being dismissed as not pressed.

45. For the balance grounds of appeal raised by the Department and the assessee, we observe that the issues for consideration are the same as that for assessment year 2010-11 and the Ld. CIT(Appeals) while passing the order has followed the order for assessment year 2010-11. Accordingly, our observations made for assessment year 2010-11 shall apply to assessment year 2011-12 as well.

Ground number 2 of assessee’s appeal: Ld. CIT(Appeals) erred in confirming addition to the extent of ~ 5,10,53,900/- from total addition of ~ 23,11,66,577/-by a ALP adjustment

Ground number 1 of Department’s appeal: Ld. CIT(Appeals) erred in deleting addition of ~ 13,54,99,305/- u/s 92CA(3) of the Act

46. In light of our observations in relation to this ground of appeal in assessment year 2010-11, ground number 2 of the assessee’s appeal and ground number 1 of the Department’s appeal are dismissed.

Ground number 3 of assessee’s appeal: Ld. CIT(Appeals) erred in confirming addition to the extent of ~ 92,66,513/- out of total disallowance of ~ 1,15,90, 255/- out of total deduction claimed under section 35D of the Act

Ground number 2 of Department’s appeal: Ld. CIT(Appeals) erred in deleting addition of ~ 23,23,742/- made under section 35D of the Act on account of share of issue expense

47 We observe that the order has been passed by Ld. CIT(Appeals) on similar lines as previous year’s order.

48. With respect to relief of Rs. 23,23,742/-, against which the Department is in appeal, Ld. CIT(Appeals) has given a specific finding how these expenses are related to share issue expenditure and hence covered with the scope of s. 35D of the Act. Accordingly, we find no infirmity in the finding of Ld. CIT(Appeals) and the appeal of the Department is dismissed with respect to relief granted by Ld. CIT(Appeals).

49. Accordingly, both the appeals of the assessee and Department are dismissed with respect to this issue. Accordingly, Ground No. 3 of the assessee’s appeal and Ground No. 2 of the Department’s appeal are dismissed.

Ground number 4 of the assessee’s appeal: Ld. CIT(Appeals) erred in confirming addition of ~ 54,59,419/- made considering interest income not capital nature

50. The facts of this ground of appeal are similar to ground of appeal number 3 of the Department for assessment year 2010-11.

50.1 However, during the year under consideration, as opposed to last year, Ld. CIT(Appeals) gave a specific finding that the interest earned by the assessee during the pre-commencement period is not in any way linked with power generating units. The Ld. CIT(Appeals) has given a specific finding “even during the appellate proceedings, appellant has failed to establish nexus of everyday with power project carried out by appellant hence observations made in appellate order for AY 2010-1 1 are not applicable in year under consideration”. While we are in agreement with the view that in case assessee is able to establish a nexus between interest on deposits made and the power project, the interest income would not be taxed as income from other sources. However, at the same time, if the assessee is unable to establish such nexus, as pointed out by Ld. CIT(Appeals), then in such case, the interest income so earned is taxable as “ income from other sources”. Before us, the counsel for the assessee submitted that on similar facts, ld. CIT(A) for assessment year 2010-11 gave relief to the assessee. However, we observe that both the Assessing Officer and ld. CIT(A) have given specific finding on facts that in the instant year the assessee company has failed to establish the direct link with the power generating units and fixed deposits made for common purposes. Both the Assessing Officer and ld. CIT(A) gave a specific finding that there is no nexus between the fixed deposit made and the power generating units in respect of which the fixed deposits were made for common purposes.

51. In the result, ground number 4 of the assessee’ s appeal is dismissed.

Ground number 5 of assessee’s appeal: Ld. CIT(Appeals) erred in confirming addition to the extent of ~ 39,99,116/- from total addition of ~ 10,10,83,248/- made under section 14A of the Act

Ground number 4 of Department’s appeal: Ld. CIT(Appeals) erred in deleting disallowance made under section 14A read with Rule 8D of ~  9,23, 64,116/-

52. In this case, the assessee is in appeal before us in respect of disallowance on account of administrative expenses, especially in light of the fact that the assessee has suo moto disallowed a sum of ~ 23,60,008/- towards administrative expenses. Further, the counsel for the assessee submitted that since the assessee primarily made strategic investments subsidiaries only, any further amount on account of disallowance of administrative expenses is uncalled for in the instant set of facts.

53. We have dealt with this aspect in the order for assessment year 2010- 11 and since the facts were both the years under consideration are similar, our observations for assessment a 2010-11 would apply for assessment year 2011-12 as well.

54. In the result, the appeal of the assessee as well as of the Department is partly allowed in respect of the above ground of appeal.

Ground number 6 of assessee’s appeal: Ld. CIT(Appeals) erred in confirming the disallowance of ~ 61,871/- made for claim of excess depreciation @ 15% instead of 10%

55. We have already discussed this ground (ground of appeal number 4 of assessee’s appeal for assessment year 2010-11) and since the facts of both the years under consideration are similar, our observations for assessment year 2010-11 would apply for assessment a 2011-12 as well.

56. In the result, the appeal of the assessee with respect to this ground of appeal is allowed.

We shall discuss the Departments grounds of appeal.

57. Departments grounds of appeal number 1, 2 and 4 have already been dealt in the preceding paragraphs under same are not being reproduced hereunder again.

Ground number 3 of Department’s appeal: Ld. CIT(Appeals) erred in deleting disallowance of depreciation of ~ 10,79,33,090/- only leasehold rights over the land treating the same as intangible asset

58. We have already adjudicated on this ground of appeal (ground of appeal number 2 of Department’s appeal for assessment year 2010-11) and since the facts and issues for consideration for both the years under consideration are similar, our observations for assessment year 2010-11 would apply to assessment year 2011-12 as well.

59. In the result, ground number 3 of the Department’s appeal is dismissed.

Ground number 5 of Department’s appeal: Ld. CIT(Appeals) erred in  deleting disallowance of claim of excess depreciation of ~ 1,78,64,268/-

60. We have already adjudicated upon this ground of appeal (ground of appeal number 5 of the Department’s appeal for assessment year 2010-11) and since the facts and issues for consideration for both the years under consideration are similar, our observations for assessment year 2010-11 would apply to assessment year 2011-12 as well.

61. In the result, ground number 5 of the Department’s appeal is dismissed.

Ground number 6 of Department’s appeal: Ld. CIT(Appeals) erred in deleting disallowance of travelling expense of ~ 99,90,000/-

62. We have already adjudicated upon this ground of appeal (ground of appeal number 6 of the Department’s appeal for assessment year 2010-11) and since the facts and issues for consideration for both the years under consideration are similar, our observations for assessment year 2010-11 would apply to assessment year 2011-12 as well.

63. In the result, ground number 6 of the Department’s appeal is dismissed.

64. In the combined result, both the appeals of the assessee are partly allowed and both the appeals of the Department are also partly allowed.

Order pronounced in the open court on 10-02-2023