WELSPUN CORP LTD, MUMBAI V. DCIT CEN CIR 22, MUMBAI

ITA 3890/MUM/2016

AI Insights

The case involves multiple appeals by both the assessee, M/s. Welspun Corp Ltd, and the revenue against the orders of the Commissioner of Income Tax (Appeals)-58, Mumbai. The appeals were consolidated due to common issues and identical facts across the years 2008-09 to 2011-12. The primary issues revolved around the disallowance of additional depreciation, the treatment of certain income as capital receipts, and the adjustments made under transfer pricing regulations. The Tribunal examined each issue in light of the relevant provisions of the Income Tax Act, judicial decisions, and the submissions made by both parties.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299641 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 16-02-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 07-06-2016
• Other Referred Cases: CIT vs Thana Electricity Supply Limited, DCIT Vs. Reliance Industries Ltd., Sree Ayyanar spinning and weaving v. CIT, Saroja Mills Ltd. v. CIT, Tamilnadu Sugar Corporation v. CIT, Kesoram Industries v CIT, CIT v. Chindwara Fuels, Honda Siel Cars India Ltd. v. CIT, Kalpana Palace v/s. CIT, Kinetic Motor Co. Ltd. v. DCIT, ACIT v. Chodavaram Co-op. Sugars Ltd., Modi Industries Ltd. v. ITO, Mahindra & Mahindra Ltd v. CIT, Apollo Tyres Ltd. v. CIT, CIT v. Venkateswara Timber Depot, CIT v. Rajaram Maize Products, CIT v. Tirumala Bricks & Tiles Factory, CIT v. Wolkem (P.) Ltd., CIT v. Ponni Sugars & Chemicals Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJIV KHANDEWAL
• Assessee Lawyers: WAY OF DISALLOWING CLAIM OF ADDITIONAL; WAY OF DISALLOWING CERTAIN EXPENDITURE; WAY OF DISALLOWING CERTAIN PART OF
• Keywords: Unexplained cash credit; Capital asset; Business income; Revision of order; Depreciation; Transfer pricing; Search and seizure; International transaction; Additional depreciation; Earning of tax free income; Question of law; Wrong claim; Competent authority; Capital receipt; Revenue expenditure; TDS; Rule 8D; Set aside
• Section: 32; 143(3); 142(1); 153A; 14A; 115JB; 40(a)(ia); 32(1)(iia); 37(1); 69B; 80IA; 144C; 251; 143(2); 191; 64; 43; 48; 40a(ia); 73; 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER & SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No. 3890/Mum/2016 (2008-09) ITA No. 5063/Mum/2016 (2009-10) ITA No. 5165/Mum/2016 (2010-11) ITA No. 5166/Mum/2016 (2011-12) M/s. Welspun Corp Ltd, 7 th Floor, Welspun House, Kamala Mill Compund, SB Marg, Lower Parel, Mumbai -400013. Vs. DCIT, Central Circle - 22, (Now CC – 3(3)) Room No. 465, 4 th Floor,AayakarBhavan, Mumbai-400020. ./ज आइआर ./PAN/GIR No. : AAACW0744L Appellant .. Respondent ITA No. 4364/Mum/2016 (2008-09) ITA No. 5483/Mum/2016 (2009-10) ITA No. 5043/Mum/2016 (2010-11) ITA No. 5044/Mum/2016 (2011-12) DCIT, Central Circle - 22, (Now CC – 3(3)) Room No. 465, 4 th Floor, Aayakar Bhavan, Mumbai – 400020. Vs. M/s.Welspun Corp Ltd 7 th Floor, Welspun House, Kamala Mill Compound, SB Marg, Lower Parel, Mumbai-400013. ./ज आइआर ./PAN/GIR No. : AAACW0744L Appellant .. Respondent Appellant/Respondent by : Mr.Rajiv Khandewal.AR Respondent/Appellant by : Ms.Samruddhi Hande.DR ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 2 - Date of Hearing 17.02.2023 Date of Pronouncement 29.03.2023 आद श / O R D E R PER BENCH: These are the cross appeals filed the by the assessee and the revenue against the separate orders of the Commissioner of Income Tax (Appeals)-58, Mumbai passed u/s143(3) r.w.s 153A r.w.s 144C(1) of the Act. Since the issues in these appeals are common and identical, hence are clubbed, heard and consolidated order is passed. For the sake of convenience, we shall take-up ITA.No.3890/Mum/2016 A.Y.2008-09 as a lead case and facts narrated. The assessee has raised the following grounds of appeal: The ground or grounds of appeal are without prejudice to one another. 1.a) On the fact and in the circumstances of the case and in law, the Id. CIT(A) erred in confirming the addition of 48,46,49,331/- made by the AO to the income of your Appellant by way of disallowing claim of additional depreciation on the cost of Plant & Machinery of 1,64,23,35,348/- and 78,09,11,306/- purchased in the previous years relevant to A.Ys.2006-07 and 2007-08 respectively. b) The ld. CIT(A) failed to appreciate that after the amendment of section 32(1)(iia) by the Finance Act, 2005, ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 3 - the condition regarding the previous year which was present in the pre-amended provisions of section 32(1)(iia) has been deleted and therefore the Appellant is eligible for additional depreciation for subsequent years also in absence of any reference to a specific previous year in the amended provisions of section 32(1)(iia). 2.a) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition of 6,78,82,060/- (subject to certain rectification of apparent mistakes) made by the AO to the income of the Appellant by way of disallowing certain expenditure claimed to have been incurred relating to exempt income invoking the provisions of section 14A r.w.r.8D. b) The ld. CIT(A) failed to appreciate that having regard to the accounts there is no reason and basis for the AO in reaching to dis-satisfaction with the correctness of the claim of the Appellant that no expenditure was incurred in relation to dividend income which does not form part of the total income. c) In reaching to the conclusion and confirming such addition, subject to certain rectification, the ld. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors. 3.a) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in fixing the benchmark of interest @ 7.11% pa as against 5.25% and 6.25% adopted by the Appellant and the TPO respectively in respect of interest on advance to AE and investment in cumulative preference shares of AE for adjustment towards "arm's length price" in respect of international transactions with AE and thereby further erred in enhancing/confirming the addition made by the TPO/AO. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 4 - b) The ld. CIT(A) failed to appreciate that all these transactions were carried out by the Appellant at arm's length price. c) In reaching to the conclusion and making/confirming such enhancement/addition the ld. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors. d) No opportunity of showing cause for enhancement was allowed to the Appellant by the CIT(A). 4. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition to the extent of 6,78,82,060/- (subject to certain rectification) to the book profit of the Appellant by way of adding back disallowance made u/s. 14A r.w.r.8D and thereby erred in enhancing the book profit artificially. b) The ld. CIT(A) failed to appreciate that the book profit means net profit as shown in the profit & loss account laid before the annual general meeting of a company in accordance with the provisions of section 210 of the Companies Act, 1956 as adjusted by certain adjustment specified in the Explanation 1 to section 115JB(2) and there is no scope for the AO to make any further adjustment. 5. The ld. CIT(A) erred in holding that levy of interest u/s. 234B, 234C, 234D and 220(2) of the Income Tax Act, 1961 is consequential. The Appellant denies its liability for such interest. 6. The ld. CIT(A) erred in holding that ground raised disputing initiation of the penalty proceedings u/s.271(1)(c) of the Income Tax Act, 1961 is premature. The Appellant denies its liability for such penalty. The Appellant craves leave to add, alter, amend or delete any or all of the above grounds of appeal. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 5 - 2. The brief facts of the case are that the assessee company is engaged in the business of manufacturing of steel pipes, plates and coils. The assessee has filed the return of income for the A.Y 2008-09 on 29.09.2008 disclosing a total income of Rs. 3,95,49,252/-. There was a search and seizure operations U/sec132 of the Act conducted on the Welspun Group of cases on 13.10.20110 and the assessee company was also covered under the search. The Assessing Officer (AO) has issued notice u/s 153A of the Act and in response to notice, the assessee has filed the return of income on 09.09.2011 disclosing a total income of Rs.3,95,49,252/- under the normal provisions of the Act and book profit u/s 115JB of Rs. 526,44,48,274/-.Subsequently, the AO has issued notice u/s 143(2) and 142(1) of the Act along with questionnaire. In compliance to the notices, the L. AR of the assessee appeared from time to time and submitted the details and the case was discussed. Since the asseessee has international transactions with its AE, the matter was referred to TPO for determination of ALP and the order U/sec92CA(3) of the Act dated 18-03-2013 with the transfer pricing adjustments. Further the draft assessment order u/s ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 6 - 143(3) r.w.s 153A r.w.s 144C of the Act was passed on 25.03.2013. The assessee has filed a letter dated 26.03.2013 mentioning that an appeal will be filed with the CIT(A) against the final assessment order. (i) the AO on the first disputed issue, find that the assessee has claimed deduction of additional depreciation @ 20% u/s 32(1)(iia) of the Act in respect of plant and machinery which were installed and put to use in the previous year relevant to A.Ys 2006-07 and 2007-08 and the additional depreciation has been claimed on the same plant and machinery in the subsequent years including the current assessment year. The additional depreciation has been computed every year @ 20% on the cost of the plant and machinery in the year of acquisition and not on the written down value at the beginning of the next year. The AO found that the assessee has claimed that such additional deprecation of Rs.48,46,49,339/- in the current year. Whereas the assessee has filed the explanations for the additional claim of depreciation referred at Para 5.2 of the assessment order. Whereas the AO has considered the facts and submissions on the claim of deduction u/s 32(1)(iia) of the Act and finally dealt on the provisions of the ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 7 - Act, judicial decisions and made addition observing at Para 5.15 & 5.16 of the order as under: 5.15. Thus, the contention of the assessee that because of the amended provisions of the law, it gives a right to him to make a claim for additional depreciation not only in the year of purchase / installation but also in the subsequent year, cannot be accepted in as much as there was no such intention expressed neither at the time of introduction of bill nor it is expressly provided in the amended Act. The assessee has thus made a patently wrong claim which is not allowable. 5.16. In view of the above, the arguments of the assessee are only misconceived and misleading and deserve no further consideration. The mere fact that a baseless claim was raised by the assessee is not sufficient to attribute any ambiguity or doubt making such claim debatable. It was held in CIT vs Thana Electricity Supply Limited 206 ITR 727 (Bom) that if the court does not think so, the fact that two different views have been advanced by parties and argued forcefully that one such view which is favourable to the assessee has been accepted by some Tribunal or High Court, that by itself will not be sufficient to attract the principle of beneficial interpretation. As brought out above, there is no ambiguity in the relevant law. The instant claim is thus devoid of merit and therefore the same is rejected. This results in addition of Rs.48,46,49,331 as income of the assessee. Since the assessee made a patently wrong claim of additional depreciation only in order to reduce the Incidence of tax I am satisfied that the assessee has submitted inaccurate particulars of income and/or concealed the particulars of income, hence, penalty proceedings u/s.271(1)(c) of the Act are initiated. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 8 - 3.(ii) On the second disputed issue, in respect of claim of refund of excise duty of Rs. 122,22,92,941/- in the computation of income. The assessee was called to submit the documentary evidence for receipt of the above incentive and benefits including the copy of the scheme under which incentive / benefit has been obtained and the documentary evidence claimed as capital receipt. The assessee has filed detailed submissions explaining the nature of transactions on 02.01.2013 referred at Para 7.3 of the order. Whereas the AO has dealt on the facts, provisions and was not satisfied with the explanations and treated the claim as revenue receipt observing at Para 6.9 & 6.10 of the order as under: 6.9. The benefit available to the assessee is not for putting up the plant nor it is clearly spelled out as a capital subsidy in the notification. It is a benefit available only if the manufacturing of prescribed goods are carried out in the new industrial undertaking. During the course of assessment proceeding the assessee has relied on the Special bench decision in the case of DCIT Vs. Reliance Industries Ltd., 88 ITD 273. With due respect, the decision of the said Tribunal is not acceptable in as much as while deciding the issue the Tribunal has not properly appreciated the principles enunciated by the supreme court in the case of Sahney Steel. Further, in the case of Reliance Industries the hon'ble Tribunal has not explained in what way all the principles enunciated by the Supreme ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 9 - Court in the decision of Sahney Steel have been followed. Further, there are various other high court decisions which have not been taken into consideration while deciding the issue on subsidies. In all these decisions reimbursement of revenue expenditure was held to be operational subsidy on reveue account and therefore taxable. The decisions are: Sree Ayyanar spinning and weaving v. CIT 240 ITR 106 (MAD): Saroja Mills Ltd. v. CIT 220 ITR 626 (Mad). Similarly, subsidy received as refund of sales tax or purchase tax was held to be on revenue account and therefore taxable. Vide decision in the case of Tamilnadu Sugar Corporation v. CIT 251 ITR 843 (Mad), CIT v. Chindwara Fuels 245 ITR 9 (Cal), Kesoram Industries v CIT 191 ITR 518 (Cal.). Therefore, refund of excise duty receipts are to be taxed as revenue receipts only. 6.10. In view of above, I hold that the Refunds of Excise Duty paid received by the assessee amounting to Rs.122,22,92,941 is treated as revenue receipt and taxed accordingly. Penalty proceedings u/s.271(1)(c) of the IT Act, 1961 are initiated separately for concealment of particulars of income/furnishing inaccurate particulars of income. 4.(iii) on the third disputed issue, the AO found that the assessee has claimed the exemption of sales tax incentive of Rs.102,87,33,272/- in the computation of income and the assessee was called to submit the evidence of receipt of incentives and benefits prescribed in the scheme. The assessee has filed the details referred at Para 7.3 of the assessment order explaining the basis of deduction. But the AO was not ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 10 - satisfied with the claims of the assessee and treated as revenue receipt and observed at Para 7.9 & 7.10 of the order as under: 7.9. During the course of assessment proceeding the assessee has relied on the Special bench decision in the case of DCIT Vs. Reliance Industries Ltd., 88 ITD 273. With due respect, the decision of the said Tribunal is not acceptable in as much as while deciding the issue the Tribunal has not properly appreciated the principles enunciated by the supreme court in the case of Sahney Steel. Further, in the case of Reliance Industries the hon'ble Tribunal has not explained in what way all the principles enunciated by the Supreme Court in the decision of Sahney Steel have been followed. Further, there are various other high court decisions which have not been taken into consideration while deciding the issue on subsidies. 7.10. In view of above, the 'Sales Tax incentive' received by the assessee amounting to Rs.102,87,33,272 is treated as revenue receipt and taxed accordingly. Penalty proceedings u/s.271(1)(c) of the I.T Act, 1961 are initiated separately for concealment of particulars of income/furnishing inaccurate particulars of income. 5. (iv) The A.O. on the fourth disputed issue dealt on the provisions of section 14A of the Act. During the previous year the assessee has earned dividend income of Rs.25,55,795/- and was claimed exempt. Whereas the A.O on perusal of the audited balance sheet found that the assessee has made investments ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 11 - in shares amounting to Rs. 390.47 crore as on 31.03.2008 and Rs.25.62 crore as on 31.03.2007. Such investments in the companies is for either earning the dividend income which is exempt or capital gain and expenditure was disallowed. The AO has issued show cause notice on the applicability of Sec.14A of the Act and computing the disallowance. The assessee has made the elaborate submissions explaining the investment pattern and investments are out of own funds available. But the A,O, has invoked the provisions and worked out the disallowance u/s 14A r.w.r 8D(2)(ii)&(iii) of I T Rules of Rs. 6,78,82,060/-.(v) The fifth disputed issue is with regard to disallowance of deprecation by capitalization of professional fees, the AO found that the assessee has claimed certain professional expenses incurred and are not for the purpose of business and made disallowance 37(1) of the Act and the TDS is not deducted. The A.O observes that the professional fees was capitalized under the head fixed asset and the assessee has claimed the same as expenditure by way of depreciation which is not allowable, and made disallowance of Rs. 16,99,543/-. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 12 - (vi) The sixth disputed issue the AO found that the assessee has not deducted TDS U/sec40(a)(ia) of the Act on certain expenditure and was reported in the tax audit report. Since such expenditure was capitalized and therefore deprecation cannot be allowed and made addition of Rs.21,05,829/-. 6.(vii) The seventh disputed issue is in regard to disallowance of depreciation claim on FCCB premium, where the assessee has debited in the earlier year an amount of Rs. 1,46,40,000/- in the pre-operative expenditure and cannot be allowed. The assessee has claimed the depreciation. The AO was not satisfied with the claim as the FCCB premium was capitalized under the pre-operative expenditure and subsequently capitalized under the head fixed assets, therefore depreciation of Rs. 13,48,619/- is disallowed. 7. (viii) On the eighth disputed issue with respect to claim made by the assessee in the scrutiny assessment of earlier years being FCCB issue expenditure of Rs.5,79,90,000/- which was included under the head pre-operative expenditure is not a allowable as the expenditure has been capitalized and the deprecation on the same has been claimed ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 13 - and hence made an addition of Rs.1,10,98,792/-.(ix) the ninth disputed issue with regard to transfer pricing adjustments. The AO found that the assessee has international transactions with its AE’s and therefore the matter was referred to the TPO for determination of ALP. Whereas the TPO has considered the facts, TSR and has passed the order u/s 92CA(3) of the Act with the following transfer pricing adjustments referred at Para 14.1 of the order as under: S.No Adjustment on account of Amount of Adjustment (Rs) 1 Interest on advances given to Welspun Pipes Inc. USA (7.3.4) 35,84,633 2 Investment in 5.25% cumulative preference stock Welspun Pipes Inc. USA (8.1.4) 53,055 3 Guarantee Fees - Welspun Pipes Inc. Bank of India (9.8.5) 19,51,615 4 Guarantee Fees - Welspun Pipes Inc. Exim Bank (10.4.5) 83,84,965 5 Guarantee Fees - Welspun Pipes Inc. SBI (11.4.5) 40,06,726 Total Adjustment 1,79,80,994 The AO has considered the transfer pricing order and facts that the assessee has opted to file an appeal against the order before the CIT(A).(ix) on the last disputed issue, the assessee company has claimed deduction U/sec80G of the Act of Rs. 1,52,76,513/- ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 14 - and the assessee was called to submit the supporting evidences. Since the details are not submitted, the AO has denied the deduction of claim. Finally assessed the total income of Rs. 282,69,74,620/- and worked out the book profit u/s 115JB of Rs. 533,23,30,335/- and passed the order u/s 143(3) r.w.s 153A r.w.s 144C(1) of the Act dated 26.03.2013. 8. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), the CIT(A) considered the grounds of appeal, submissions and findings of the AO and has confirmed the action of the AO in addition u/s 32(1)(iia) of the Act of additional depreciation. Whereas in respect of transfer pricing adjustment the CIT(A) has made bench marking adjustment of interest more than adopted by the assessee and TPO. The CIT(A) has confirmed the addition of disallowance u/s 14A in respect of computation of book profits u/s 115JB of the Act and granted relief in other grounds of appeal and partly allowed the assessee appeal. Aggrieved by the order of the CIT(A), both the assessee and the revenue have filed an appeal before the HonbleTribunal. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 15 - 9. At the time of hearing, the Ld. AR submitted that the CIT(A) has erred in confirming the addition of deprecation u/s 32(1)(iia) of the Act irrespective of the fact that the assessee is eligible for additional deprecation and on the second disputed issue with respect to disallowance u/s 14A of the Act. The contentions are that the assessee has invested the amounts in the group companies for business and also has the own capital and reserves are more than the investments. Since the own funds are more than the investments therefore no disallowance under rule 8D(2)(ii) is called for and the investments yielding exempt income are to be considered and relied on the judicial decisions. The Ld.AR submitted that the bench marking of interest rate @ 7.11% as against @5.25% and @6.25% adopted by the assessee and TPO is on the higher side irrespective of the fact that the assessee has advanced loan to Welspun Pipes Inc out of external commercial borrowings. Further the Ld.AR submitted that while computing book profits u/s 115JB of the Act no disallowance u/s 14A of the Act has to be made and is not liable to be added in view of the explanation-1 to Sec. 115JB of the Act and The Ld.AR substantiated the submissions with the ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 16 - factual paper book, notes, chart and judicial decisions and prayed for allowing the assessee appeal. Contra, the Ld. DR relied on the order of the CIT(A) to some extent and submitted that the revenue has filed the cross appeal. 10. We heard the rival submissions and perused the material available on record. On the first disputed issue envisaged by the Ld. AR on the disallowance of claim of additional depreciation u/s 32(I)(iia) of the Act. We find the CIT(A) has dealt on this issue referred at Para 7.3.7 and 7.4 of the order. The Hon’ble Tribunal in ITA No. 5722 & 5370/Mum/2015 for the A.Y 2007-08 has confirmed the action of the CIT(A) observed at page 8 Para No. 13 of the order read as under: 13. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The provision of section 32(1)(iia) of the Act, deals with additional depreciations, as per which, in case of any new plant and machinery which has been acquired and installed after 31/03/2005, by assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause(2) of section 32 of the Act. If you go through the provisions, it may be seen that normal and additional depreciation are two separate deductions ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 17 - available to the assesee and both are independent and cumulative. The expression further sum and shall be allowed in clause (iia) of section 32(1) are indicative of this propositions. The word further means something in addition to. Therefore, the additional depreciation as provided under section 32(1)(iia) is a onetime deduction provided to an assesee engaged in the business of manufacturing or production of any article or thing on any news plant and machinery, which has been acquired and installed in its business. In this legal background, the question that needs to be answered is whether, an assessee can claim additional in the subsequent years in absence of any reference to a specific previous year after amendment by the Finance Act, 2005 in section 32(1)(iia) of the Act. We noted that on a literal reading of section 32(1)(iia), the additional depreciation is restricted to one time deduction and there is no explicit provision entitling the assesee to claim additional depreciation in subsequent year or years, when the additional depreciation was allowed in the year, when plant and machinery has been put to use. Therefore, we are of the considered view that it is illogical and irrational to presume so, when the legislation intention is to allow one time additional depreciation u/s 32(1)(iia) in a previous year in which plant and machinery is installed and put to use. The Ld.CIT(A) after considering relevant facts has rightly noted that there is no error in the findings recorded by the ld. AO in disallowances of additional deprecation on plant and machinery for second year. Therefore, we are of the considered view that the findings recorded by the Ld.CIT(A), while confirming additions made by the Ld. AO towards of additional depreciation in subsequent years is in accordance with law as enumerated under the provision of section 32(1)(iia) of the Act and hence, the findings of the ld. CIT(A) does not call ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 18 - for any interference from our side. Accordingly, the ground taken by the assessee is dismissed. We find that this disputed issue is covered by the decision of the Hon’ble Tribunal and we follow the judicial precedence and dismiss this ground of appeal of the assessee. 11. The second disputed issue is with respect to disallowance u/s 14(A) of the Act, the contentions of the Ld.AR that the disallowance U/sec14A r.w.r 8(D)(2)(ii)&(iii) restricted to Rs. 98,96,101 is against the law. The assessee invested the money in group companies as the assessee having own capital and reserves which was more than the investments and since the assessee’s own funds are exceeding the investments , no disallowance rule 8(D)(2)(ii) is called for. The Ld. AR relied on the decision of the Hon’ble Jurisdiction High Court in the case of HDFC Bank Ltd. Vs. DCIT (2016) 283 ITR 529 (Bom) and the disallowance u/s 14A r.w.r 8(D)(2)(iii) has to computed considering only investments which yield exempt income as held in the case of ACT Vs Vireet Investment Pvt Ltd 165 ITD 27 (Del) Special Bench held that only those investments which yield ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 19 - exempted income are considered for computing the average value of investments in respect of computing the disallowance under rule 8D(2)(iii) of the IT Rules. The Ld.AR demonstrated the details/chart of dividend income and investments in the mutual funds in the dividend yielding schemes. We find Honble High Court of Bombay in the case of CIT Vs. Reliance Utilities & Power Ltd, [2009] 178 taxman 135 Bombay has observed as under: Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessee- company was engaged in business of generation of power - It had made investments in its sister concern from January, 2000 to March, 2000- Assessing Officer was of view that sum of Rs. 213 crores was invested out of assessee's own funds and Rs. 147 crores was invested out of borrowed funds Accordingly, Assessing Officer disallowed a part of interest claimed On appeal, assessee-company contended that it had interest-free funds worth Rs. 398 crores comprising of share capital, reserves and surplus and depreciation reserves and, thus, entire investment had been made in sister concern out of interest-free funds Commissioner (Appeals) accepted assessee's contention and directed Assessing Officer to allow entire amount of interest under section 36(1)(iii) Tribunal upheld order of Commissioner (Appeals) - On instant appeal, it was seen that Commissioner (Appeals) as also Tribunal had recorded a clear finding that assessee had interest-free funds of its own which had been generated in course of year commencing from 1-4-1999 Further, in terms of balance-sheet there was an availability of Rs. 398.19 ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 20 - crores including Rs. 180 crores of share capital - Whether if there are funds available, both, interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with company, provided said funds are sufficient to meet investments Held, yes Whether since, in instant case, said presumption was clearly established in view of findings recorded by Commissioner (Appeals) and Tribunal, impugned order passed by said authorities was to be affirmed - Held, yes Accordingly, we follow the judicial precedence, and find that the submissions of the Ld.AR are to be considered and direct the Assessing officer to recompute the disallowance u/s 14A r.w.r 8D(2)(ii) & (iii) as per the ratio of the decisions discussed above and allow this ground of appeal for statistical purposes. 12. The third disputed issue, the Ld. AR submitted that the CIT(A) erred in bench marking the interest rate @7.11% as against @5.25% and @6.25% adopted by the assessee and TPO, in respect of interest on advance to AE and investment in cumulative preference shares. The contention of the Ld. AR that the assessee has advanced loan to Welspun Pipes Inc USA @ 5.25% p.a out the external commercial borrowings on which assessee paid interest @ 1.54 to 4.25% ie LIBOR+125 basic points. Subsequently ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 21 - Welpsun Pipes Inc invested entire funds in the bonds of Arkansas CIT Government bonds at rate of @5.25% for availing fiscal benefit and on the Internal comparables, the AE has raised additional funds @4 to @4.25% further the TPO has added 3% as risk spread to @3.25% p.a being average cost of assessee’s funds in form of ECB and FCCB. Whereas the assessee’s objective was not to enter into any financial arrangement but to merely facilitate factor for Welpsun Pipe Inc as also no financial burden was incurred. The assessee has recovered the interest paid on borrowings and also earned a margin. Further interest paid on loan taken by Welpsun Pipe Inc. is less than @5.25% which is based on the Libor. the contentions of the Ld. AR has to be accepted. We found that the assessee has advanced loan at 5.25% and considering the factors, principles and evidences further addition on interest rate cannot be accepted and accordingly direct the TPO to exclude the increase component and allow this ground of appeal in favour of the assessee. 13. The Last disputed issue envisaged by the Ld. AR that the AO has made disallowance u/s 14A of the Act ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 22 - and added to book profits u/s 115JB of the Act and the CIT(A) has confirmed the same. We found that disallowance u/s 14A r.w.r. 8D is not liable to be added in view of the Explantion-1 to Sec. 115JB of the Act. The Ld. AR has relied on judicial decisions in the case of Acit Vs Vireet Investments(165 ITD 27 (Del) Special Bench held as under: “the computation under clause (f) of Explanation 1 to Sec. 115JB(2), is to be made without restoring to the computation as contemplated u/s 14A r.w.r 8D of the Income Tax Rules, 1962” The contentions of the Ld.AR that the assessee has been maintaining the books of accounts as per the requirements of Part II and III of the schedule VI to the Companies Act and the same were certified by the auditors, therefore, there was no scope for AO to make adjustment to the book profit beyond what was authorized by definition in Explanation 1 to Sec. 115JB of the Act as held in the case of Kinetic Motor C. Ltd Vs. DCIT 262 ITR 330 (Bom). The Hon’ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT 255 ITR 273 (SC) held that powers of the AO to adjustments which are authorized under Sec. 115J/115B of the Act, the provisions of Sec. 14A ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 23 - cannot be imported while computing book profit u/s 115JB of the Act. We fallow the ratio of the judicial decisions and direct the AO to exclude the disallowance U/sec14A of the Act in computing the book profits U/sec115JB of the Act and allow the ground of appeal. 14. In the result, the appeal of the assessee is partly allowed for statistical purposes. ITA No. 4364/Mum/ 2016, A.Y 2008-09 15. The revenue has raised the following grounds of appeal: 1) "On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in holding that backward area incentive consisting of Sales Tax Incentive and Excise duty benefits as capital receipts"> 2) "On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in applying Explanation 10 to section 43(1) and should have directed that the backward area incentive should have been reduced form the actual cost". 3) "On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition on account of depreciation on fixed assets u/s 40a(ia) rw sec. 37 in respect of capitalization of professional fees capitalized of certain expenses, FCCB premium and FCCB Issue Expenses". ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 24 - 4) "On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition by way of disallowing FCCB Premium". 5) "On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in holding that the guarantee rate of 1.5% charged by the assessee on guarantees issued on behalf of its AE was as per arm's length price". 6) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 16. As regards ground of appeal No. 1 & 2 were the relief granted by the CIT(A) being receipt on account of excise duty benefits and sales tax incentives treated as capital receipt and reduction of capital value of backward area incentives from value of assets. We found that the CIT(A) considered the facts, submissions, judicial decisions and the financial aspect of the assessee and relied on the circulars and granted the relief observed at Para 8.2.8 to 8.6 of the order read as under: 8.2.8 It has relied on the decision of the Full Bench of the Kerala High Court in the case of CIT v. Ruby Rubber Works Ltd. [1989] 178 ITR 181 wherein subsidy given for replanting rubber plants of high yielding varieties or rubber plants which the Rubber Board and the Government thought necessary for the development of the rubber industry, a purpose of vital public interest, was treated as a capital receipt by observing it to be difficult to say that the subsidy given to the rubber growers for ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 25 - replanting is not for a beneficial purpose. This decision of the Full Bench of the Kerala High Court is affirmed by the Supreme Court in the case of Kalpetta Estates Ltd. v. CIT [1996] 221 ITR 601 (SC) stating that receipt of re- plantation subsidy is capital in nature. 8.25 The appellant has claimed that the Supreme Court in the case of Sahney Steel & Press Works Lad (supra) has approved the decision of the Bombay High Court in the case of Sadichha Chitra Subsidy given to the assessee in public interest, for meeting part cost of the new film, was capital receipt on the ground that the scheme of subsidy had been formulated by the authority to assist the assessee in acquiring a capital asset or for the growth of the industry generally, without any objective of supplementing the trade receipts or recoupment of revenue expenditure already incurred by the assessee. 8.2.10 It has contended that the observation of the Supreme Court in Sahney Steel & Press Works Ltd.'s case was that the fact that the subsidy was granted after the industry was set up and went into regular production, is not the operative or decisive factor in coming to the conclusion as to whether the receipt is revenue or capital in nature and that the most decisive factor is the object with which the incentive was given. Subsidy received under Sampath Incentive Scheme for repayment of loan taken for setting up/expanding an existing unit/acquiring capital asset was held as capital in character by the Calcutta High Court in the case of CIT v. Balrampur Chini Mills Ltd. [1999] 238 ITR 445. The Delhi High Court in the case of CIT v. National Co-operative Consumer's Federation Ltd. [2002] 254 ITR 599 [2001] has followed the view taken by the Calcutta High Court in the case of Balrampur Chini Mills Ltd. (supra). The Madras High Court in the case of CIT v. Madurantakam Co- operative Sugar Mills Ltd. [2003] 263 ITR 388 (Mad.) has also taken ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 26 - a similar view. The appellant has further submitted that the Sampath Incentive Scheme subsidy treatment as capital was approved by the Supreme Court in the case of CIT v. Ponni Sugars & Chemicals Ltd. [2008] 174 Taxman 87. 8.2.11 The Andhra Pradesh High Court following the above decision held in the case of CIT v. Tirumala Bricks & Tiles Factory [1996] 217 ITR 547 that if the subsidy granted is in the nature of amounts for setting up of the plant or for expansion of the plant, then the same would be a capital receipt. The refund of excise duty received by the assessee from the Excise Department was capital receipt not amounting to income of the assessee and since it was not an income, it was not covered by section 28(iv) - CIT v. Wolkem (P.) Ltd. [1997] 92 Taxman 346 (Raj). Again the Power Subsidy granted by the State Government in order to attract new entrepreneurs could not be said to arise out of normal business activity. The subsidy would not amount to a revenue receipt but a capital receipt which could not be brought to tax under section 28(iv) - CIT v. Rajaram Maize Products [1998] 234 ITR 667. 8.2.12 It has further claimed that the Benches of the Tribunal have in the under-mentioned cases held subsidy of similar nature as being capital receipt: Vishnu Sugar Mills Ltd. v. Dy. CIT [1999] 62 TTJ (Cal.) 275/ 104 Taxman 77 (Mag.); Addl. CIT v. Chodavaram Co-op. Sugars Ltd. [2003] 86 ITD 139 (Visakhapatnam); Modi Industries Ltd. v. ITO [2002] 120 Taxman 55 (Delhi) (Mag.); Honda Siel Cars India Ltd. [IT Appeal No. 5577 (Delhi) of 2004. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 27 - Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (82 ITR 363)(SC); CIT vs. India Discount Co.Ltd. (75 ITR 191) (SC); Bhor Industries vs. CIT (264 ITR 180) (Bom); and Kalpana Palace V/s. CIT 275 ITR 365 8.2.13 One can, therefore, safely conclude from the aforesaid judgments and circulars of the Board that the taxability of the incentive received by way of subsidy, reimbursement or exemption has to be determined keeping in mind the purpose/object for which it has been granted. If the subsidy, reimbursement or remission or exemption has been granted for meeting capital expenditure for achieving a notional objective, the same would, be in the nature of a capital receipt not liable to tax; if it has been granted to supplement trade receipts/profits, the subsidy, reimbursement or remission becomes taxable as revenue receipt. The manner, source and form in which the subsidy is granted are not material. 8.2.14 Finally, it has relied on the decision of the Special Bench of the Mumbai Tribunal in the case of Dy. CIT v. Reliance Industries Ltd. [2004] 88 ITD 273 (Mum.) which has been subsequently approved by the Bombay High Court. In appeal before the second appellate authority by the Department, the ITAT, Mumbai dismissed the appeal of the Department on the ground that the decision of the Special Bench in the case of DCIT V/s. Reliance Industries Ltd. (88 ITD 273-SB-Mum) remains unaltered even if the Hon'ble Supreme Court remanded the matter to the Hon'ble Bombay High Court to decide the question in accordance with the law. 8.2.15 As regard alternate plea of the ld. AO, the appellant has claimed that depreciation is allowed on the actual cost incurred by an assessee for acquiring the asset. Under section 43(1), 'actual cost' means "the ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 28 - 'actual cost' of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority". Thus, if a portion of the cost is met directly or indirectly by any person or authority, the 'actual cost' would, for the purposes of the aforesaid sections, be cost minus that cost met by others, that is, subsidies. Thus, where cost of any asset is met directly or indirectly by the Government or an authority in the form of subsidy or grant or reimbursement, then cost to that extent is not liable to be included in the actual cost of the asset to the assessee. Where the subsidy or grant or reimbursement cannot be related directly to the asset acquired, a proportionate amount is to be excluded for computing the actual cost of the asset to the assessee. 8.2.16 Where the concession/exemption is clearly relatable to acquisition of a particular asset or the subsidy is for investment made in fixed assets, such concession/subsidy would need to be reduced for the purpose of computing the actual cost of the fixed assets. In the cases of SMISSIONER OF INsubsidies by way of incentive/subsidy in the form of reimbursement of tax given to the units for the reason of promotion of industrial development in the State or for generation of employement and not to reimburse the cost of any fixed asset, the amount so received cannot be reduced from the actual cost. 8.2.17 The appellant has finally relied on the order of ITAT in its own case It is relevant to note that the issue of Backward Incentive has recently came before the ITAT, Mumbai in the case of the Appellant for the A.Y.2006-07 where the ITAT, Mumbai has allowed the appeal filed by the Department in favour of the assessee on the same facts of the case vide order ITA No.5608/M/2010 dated ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 29 - 6-11-2013. The relevant portion of the order reads as under:- "8. The second issue relates to the capital nature of the incentives received by the assessee. In this regard, it is the case of the Revenue that the said incentive of Rs.77.51 Crs (round off to nearest lakhs) constitutes a 'revenue receipt'. On the other hand, the case of the assessee is that the same is treated as 'capital receipt. During the proceedings before the first appellate authority, CIT(A) relied on the decision of the Special Bench, ITAT in the case of DCIT vs. Reliance Industries Ltd (88 ITD 273) (SB) (Mum.) and allowed the appeal of the assessee on this issue. Revenue carried the matter in appeal before the Tribunal by raising the above mentioned ground no.2, 20 and 2b. 9. During the proceedings before us, Ld Counsel for the assessee demonstrated that the said Special Bench decision of the Tribunal travelled to the Hon'ble Bombay High Court, wherein the question no.(D) relates to the present issue i.e., "[D] Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was right in holding that sale-tax incentive is a capital receipt?" would not arise. In that sense, the Special Bench decision on this issue of capital nature of the incentive remained unaltered. Further, in response to the query from the Bench on the subsequent development, if any, on the said question "D", Ld Counsel fairly mentioned that the said question was remanded by the Hon'ble Supreme Court, vide Civil Appeal No.7769/ of 2011 (Arising out of S.L.P. (c) No.9860 of 2010), to the Hon'ble High Court of Bombay to decide the question in accordance with the law. Thus, the said conclusion of the Special Bench, which is followed by the CIT(A), while granting relief to the assessee, remains unaltered. Therefore, the present impugned order of the CIT(A) does ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 30 - not call for any interference. On the other hand, Ld DR relied heavily on the order of the AO. 11. We have heard both the parties and perused the orders of the Revenue Authorities as well as the material placed before us on this issue. On perusal order cited before us, we find that the argument made by the Ld Counsel is an order, and therefore, the cited decision of the Special Bench in the assessee's own case is upheld. Therefore, in our opinion, the order of the CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, grounds no.2, 20 and 2b raised by the Revenue are dismissed." 8.2.18 The appellant has referred to a recent decision of Hon'ble ITAT in the case of M/s Welspun Steel Limited, ITA No. 8294/Mum/2014 on the same issue wherein the ITAT has held the excise and sales tax incentive to be in the nature of capital receipt not chargeable to tax. 8.3 The facts of the case have been perused in light of the submission made by the appellant and various decisions quoted by it. The main parameters for deciding the nature of an incentive is to arrive at the objects of the subsidy or incentive. It does not matter whether the amount is given in the form of a excise relief or relief on account of waiver of payment of some revenue expenses. The source from where the Govt. pays the subsidy is immaterial. It is the object of the subsidy which will decide as to whether the incentive is in the nature of capital or revenue receipt. 8.4 It is seen that Hon'ble Mumbai ITAT had an occasion to dwell on this same issue of incentives granted by the Central and State Government in Kutch arca post- earthquake and were called upon to decide the nature of incentives in the hands of appellant's sister concern M/s Welspun Steel Limited (supra). The Hon'ble Bench has held that, ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 31 - 12. Now, in the wake of the principle laid down by the Hon'ble Supreme Court, we shall examine the nature of subsidy provided to the assessee. The "Incentive Scheme 2001" for Economic Development of Kutch District of the Gujarat Government" gives the fundamental preamble which highlights the basic objective and the purpose for which the incentive by the State Government as well as Central Government is being given has been highlighted in the following manner:- "The economic activities in the district of Kutch came to a standstill on account of the devastating earthquake in the State on 26th January, 2001. New employment, opportunities could be created if new Investment takes. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption for new industries to promote large also decided to announce the scheme of sales tax incentives. Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch district". 13. From the perusal of the above, it is amply clear that the schemes launched was for setting up of new industries in the district of Kutch for the purpose of new employment opportunities and to make industrial and economic environment live. Thus, the scheme of incentives provided by the respective Governments was setting-up of a new unit and not for running of the business more profitably. As laid down by the Hon'ble Supreme Court, the form and the source of subsidy are immaterial and what is material is whether the subsidy is for setting up for a industrial unit or running it for profitability. Similarly, the Central Excise exemption was given in the public interest for setting up of a new industrial unit in the Kutch District. Accordingly on the facts of the present ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 32 - case, we conclude that the incentive given by the State Government and the Central Government is nothing but capital receipts, because applying the "purpose test" the incentive / subsidy was given only for setting up of new industrial unit and economic development and generation of new employment opportunities in the Kutch District and not for running the industry for augmenting the profit on day-to-day business. This proposition of law has been reiterated by the Hon'ble Bombay High Court in the case of CIT vs Chaphalkar Brothers, reported in 351 ITR 309, wherein the Hon'ble High Court relying upon the principles laid down by the Supreme Court in the case of Panni Sugars & Chemicals Ltd has held that if the object of the subsidy was to promote construction of multiplexes, theater complexes then, it would be on capital account. Similarly, views have been taken by the various other High Courts and Tribunal in the decision as referred and relied upon by the Ld. Counsel as above. Thus, We hold that the amount of incentive received by the assessee canno be taxed as revenue receipt as it is purely on capital account. 14. As regards the other plea raised by the AO in the order passed u/s 143 (3) r.w.s 153A and machinery installed by the assessee for setting up of a new industrial w.s 153A, we agree with the contention of the Ld Counsel that, none of the unit has been funded by the Government subsidy. The subsidy here in this case is not specifically intended to subsidies the cost of capital or plant & machinery. The incentive in the form of subsidy by the government here in this case cannot be considered as payment directly or indirectly to meet any portion of the actual cost and hence it does not fall within the purview of Explanation 10 to section 43 (1)" 8.5 In light of the clear findings of the jurisdictional ITAT on the very same issue arising in respect of a group ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 33 - company of the appellant, the excise and sales tax incentive is held as being of capital in nature, not liable to tax. The ground raised by the appellant is accordingly allowed. 8.6 Further, in light of the judgment of the Hon'ble ITAT, it is also held that the alternate position of the AO that the amount should be capitalised and reduced from the total value of assets is not correct. Accordingly, the ground raised by the appellant with respect to the alternate plea of the AO is upheld. The AO is directed not to reduce the subsidy amount from the assets for the purpose of computing depreciation. 17. We find that the Hon’ble Tribunal in the assessee’s own case for the A.Y 2007-08 in ITA No. 5722 & 5370/Mum/2015 has observed at Para 18 to 21 of the order as under: 18. The next issue that came up for our consideration from ground No.1 and 2 of revenue appeal is treatment of sales tax incentives and excise duty benefits received by the assessee as capital receipts. The Ld. AR for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai Bench in the case of Welspun India Ltd. vs DCIT in ITA No. 5376/Mum/2015 for AY 2008-09, where under identical set of facts the Tribunal held that sales tax incentives and excise duty benefits received by the assesee are in the nature of capital receipts not liable to tax. 19. The Ld. DR, on the other hand, fairly accepted that the issue is squarely covered in favour of the assesee by the decision of ITAT, Mumbai Bench in assessee group ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 34 - company cases. However, he strongly supported order of the Ld. AO and also, referred AS-2 and AS-10 issued by the ICAI for valuation of inventory and accounting of fixed assets and submitted that as per the provision of section 43(1) and Explanation (10), the same needs to be reduced from actual cost of assets. 20. We have heard both the parties, perused the material available on record and gone though orders of the authorities below. We find that an identical issue has been considered by the co-ordinate bench of ITAT, in the case of Welspun India Ltd. Vs DCIT in ITA No. 5376/Mum/2015, where under identical set of facts, the Tribunal held that sales tax incentives and excise duty benefit received by the assessee is in the nature of capital receipts not liable to tax. The relevant findings of the Tribunal are as under:- “5.2. This issue of chargeability to income-tax of incentives by way of refund of excise duty and exemption of sales tax incentive which were given post commencement of production after the new industrial unit was set up by entrepreneurs in Kutch District has now reached before the tribunal at the behest of the Revenue and both the parties have advanced detailed arguments including written submissions filed by Revenue. The contentions were raised by Revenue’s Special Counsel to explain that there is a difference between subsidy and incentive. The learned Special Counsel for Revenue explained that subsidy involves cash flow while there is no cash flow in the case of incentives. The Special Counsel for Revenue relied upon the Accounting Standard AS-2 issued by ICAI , para 7 to contend that cost of purchases of the inventories will include purchase price including duties and taxes other than those duties and taxes subsequently recoverable by enterprise from the taxing authorities. Thus, it was submitted in alternative ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 35 - that even if the said incentives are treated as capital receipt by tribunal, the taxes recoverable from Government are not part of the cost of the asset and the refund of Excise duty and exemption of Sales tax incentives should be reduced from cost of the assets before allowing depreciation, while on the other hand Ld. Counsel for the assessee has submitted that the issue of said Kutch investment subsidy incentive by way of refund of Central Excise and Exemption of Sales Tax incentives have been gone through by the ITAT, Mumbai Benches in the case of group concern of the assessee in Welspun Steel Ltd., v. DCIT/ACIT, vide appellate order dated 18.12.2015 , in appeals in ITA no. 7630/Mum/2011 and 8294/M/2011 for AY 2007-08, ITA no. 6371/Mum/2014 for AY 2006- 07, ITA no. 6372/Mum/2014, 6304/Mum/2014 for AY 2007-08, ITA no. 6373/Mum/2014, 6305/Mum/2014 for AY 2008-09, ITA no. 6374/Mum/2014, 6306/Mum/2014 for AY 2009-10, ITA no. 6375/Mum/2014, 6307/Mum/2014 for AY 2010- 11, ITA no. 6376/Mum/2014, 6308/Mum/2014 for AY 2011-12, vide common order dated 18.12.2015 , wherein the tribunal has held that the said incentives are capital receipt and further it has been held that the said amount of incentives received by the assesee shall not be reduced from the cost of the asset of the assessee despite provisions of Section 43(1), Explanation 10 , by holding as under:- ― 5. The brief facts qua the issue involved is that, assessee is engaged in the business of manufacturing of sponge Iron, Steel Ingots and rolled product. In the wake of devastating earthquake in Kutch District, Gujarat, the Central Government, vide notification No. 39/2001 dated 7th August, 2001 issued an excise benefit incentive scheme and State Government of Gujarat also vide its Notification dated 9th November, 2001 announced an incentive scheme for Sales-tax exemption known as ―Incentive Scheme, 2001 for ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 36 - Economic Development for Kutch District‖. Both these schemes were for setting-up of a new industrial unit/s in Kutch District after complying with the terms and conditions as set out in the notifications and schemes of the Central and State Government respectively. The object of both the schemes was economic development of Kutch District after the earthquake and creation of new employment opportunities and attraction of large scale investments. During the previous year, the assessee had received following incentives by the State government and Central government:- (i) Sales-tax incentive - Rs. 12,95,99,499 (ii) Central Excise benefit -Rs. 22,37,23,672 Total -Rs.35,33,23,171 The amount of incentive received was credited to the profit and loss account, however, the assessee claimed that the said receipts are not taxable as they are capital receipts. The AO while making the assessment has rejected the claim of the assessee on the ground that in the assessment year 2006-07, the assessee‘s claim was rejected by the AO on the ground that the decision of Special Bench in the case of Reliance Industries is pending for disposal before the Hon‘ble Bombay High Court. 6. The Ld. CIT(A) too following the decision of Bombay High Court in the case of Reliance Industries, allowed the assessee‘s appeal. However, later on, this decision of the Hon‘ble Bombay High Court has been set aside to the Tribunal for fresh adjudication. 7. Before us, it has been stated that this issue of subsidy / incentive in the case of the assessee had reached to the stage of ITAT, whereby the Tribunal, vide order dated ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 37 - 28.12.2011 had set aside this issue to the file of the AO on the ground that authorities below have not analysed the scheme of subsidy / incentive granted by the respective governments. It has been informed that, till date no assessment order has been passed in pursuance of Tribunal order. Instead a fresh assessment order has been passed under section 143(3) r.w.s. 153A wherein this issue has been confirmed by the AO again without proper analyzing the ̳purpose test‘ of the scheme. 8. The Ld. Counsel for the assessee submitted that, now there is catena of decisions not only of the Tribunal but also of the various High Courts including that of the jurisdictional High Court, in favour of the assessee that if the subsidy is given for setting up for a new industrial unit or plant then it is on capital account. In support of this contention a separate compilation of case laws have been filed before us. Explaining the nature of scheme, he submitted that the fundamental object for both the schemes was to set up an industrial plant for economic development and creation of new employment opportunities. From the perusal of these schemes which have been placed in the paper book from pages 35 to 47, he submitted that it can be seen that they were purely for assisting the entrepreneur for setting-up new industrial units and not for running of any industry for profit. He refer to preamble as given in the ―Incentive Scheme of 2001 for Economic Development of Kutch District‖ issued by Government of Gujarat dated 09.11.2001. Even in the Central Excise Notification, the same was issued in a public interest for setting up of a new industrial plant and the incentive of Excise Duty benefit was given for a period of five years. He further submitted that the nature of incentive under both the notifications and the accounting treatment by the assessee as stated by the assessee before the authorities below was as under:- ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 38 - (a) The nature of incentives under the Notification and the Scheme and the present accounting treatment are summarized as under:- (a) Excise Duty (in view of the Notification) - Refund of the excise duty paid through PLA on finished goods cleared from the unit after taking Cenvat credit on the inputs. This amount is credited to the profit and loss account as 'Excise Benefit Received and inadvertently offered to tax. Presently, there is no limit for the quantum of such incentive. (b) Sales Tax/Value Added Tax (in view of the Scheme) - Purchase of inputs without sales tax and sales without charging of sales tax thus, claiming exemption. However, after the introduction of VAT, refund of VAT paid on inputs and remission of VAT collected on sales is available. Both these components are credited to the profit and loss account as 'Sales Tax Incentives Received' and inadvertently offered to tax. There is a monetary limit specified for the quantum of this incentive linked to investment that is eligible under the Scheme. (c) The incentive can be availed of only after commencement of production. Further, in so far as it relates to the incentives under the Scheme, the unit has to invest at least 50% of the incentives in the State of Gujrat within a period of 10 years from the date of commercial productio”. Thus, he submitted that, looking to the objects and the purpose for which subsidy was given, the incentive receipts has to be treated as capital. In support of his contention, besides several decisions, he placed reliance on the following decisions:- 9. Ld. Counsel further pointed out that in the case of the assessee, a search and seizure action had taken place on 30.10.2010 in Welspun Group of cases and in pursuance ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 39 - of that notice u/s 153A was issued for the impugned assessment years. The Ld. AO besides treating the said incentives as revenue receipts had taken an additional point by way of an alternative observation that in case, the said receipts are treated as capital receipts, then same shall be reduced from the costs of assets and depreciation claimed on the net cost of the assets will be allowed after reducing the amount of incentives in terms of Explanation 10 to section 43(1). He submitted that such a contention of the AO cannot be upheld, because the same is not applicable in the present case at all, because there is no direct acquisition of asset from the Government subsidy. The subsidy is received in the form of excise tax benefit and sales-tax incentive only when the assessee had set up the whole industrial unit and starts manufacturing and commenced its business of sale. Thus, the said provision is not applicable and in support of his contention, he relied upon the following Tribunal decisions:- 10. On the other hand Ld. DR strongly relied upon the assessment order especially passed by the AO under section 143(3) r.w.s. 153A dated 25.03.2013 and submitted that, if the incentive/ subsidy has been given in the form of sales-tax or exemption of excise duty then it directly leads to augmentation of profit of the assessee and hence, it is nothing but revenue receipts. 11. We have carefully considered the rival contentions and also perused the relevant material placed on record. The main issue involved is, whether the incentive / subsidy provided by the State Government in the form of sales-tax incentive and in the form of Central Excise benefit by the Central Government for sums aggregating to Rs. 35,33,23,171/- is to be treated as capital receipts or revenue receipts. The Hon‘ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd vs CIT, reported in ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 40 - [2008] 306 ITR 392 after referring to the earlier decisions of the Supreme Court in the case of Sahney Steel Works Ltd v CIT, reported in [1999] 228 ITR 253, held that the ―purpose for which subsidy is given is the crucial factor‖. The purpose is to be judged from the character of the receipts in the hands of the assessee which has to be determined with respect to the purpose for which the subsidy is given. The point of time is not relevant and also the source and the form of subsidy is immaterial. If the subsidy has been given to set-up new units or for substantial explanation of existing units, then it is a capital receipt. 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. The relevant observation of the Hon‘ble apex Court in this regard given in para 14 reads as under:- 14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel & Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the. capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of. refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis Of the analyses of the Scheme therein that the subsidy given was on revenue ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 41 - account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel & Press Works 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 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 setup 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 ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 42 - 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‖. 12. Now, in the wake of the principle laid down by the Hon‘ble Supreme Court, we shall examine the nature of subsidy provided to the assessee. The ―Incentive Scheme 2001 for Economic Development of Kutch District of the Gujarat Government‖ gives the fundamental preamble which highlights the basic objective and the purpose for which the incentive by the State Government as well as Central Government is being given has been highlighted in the following manner:- “The economic activities in the district of Kutch came to a standstill on account of the devastating earthquake in the State on 26th January, 2001. New employment, opportunities could be created if new Investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption for new industries to promote large scale investment in the district, along with which the State Government has also decided to announce the scheme of sales tax incentives. Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch district. 13. From the perusal of the above, it is amply clear that the schemes launched was for setting up of new industries in the district of Kutch for the purpose of new employment opportunities and to make industrial and economic environment live. Thus, the scheme of incentives provided by the respective Governments was setting-up of a new unit and not for running of the business more ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 43 - profitably. As laid down by the Hon‘ble Supreme Court, the form and the source of subsidy are immaterial and what is material is whether the subsidy is for setting up for a industrial unit or running it for profitability. Similarly, the Central Excise exemption was given in the public interest for setting up of a new industrial unit in the Kutch District. Accordingly on the facts of the present case, we conclude that the incentive given by the State Government and the Central Government is nothing but capital receipts, because applying the ―purpose test‖ the incentive / subsidy was given only for setting up of new industrial unit and economic development and generation of new employment opportunities in the Kutch District and not for running the industry for augmenting the profit on day-to-day business. This proposition of law has been reiterated by the Hon‘ble Bombay High Court in the case of CIT vs Chaphalkar Brothers, reported in 351 ITR 309, wherein the Hon‘ble High Court relying upon the principles laid down by the Supreme Court in the case of Ponni Sugars & Chemicals Ltd has held that if the object of the subsidy was to promote construction of multiplexes, theater complexes then, it would be on capital account. Similarly, views have been taken by the various other High Courts and Tribunal in the decision as referred and relied upon by the Ld. Counsel as above. Thus, We hold that the amount of incentive received by the assessee cannot be taxed as revenue receipt as it is purely on capital account. 14. As regards the other plea raised by the AO in the order passed u/s 143(3) r.w.s. 153A, we agree with the contention of the Ld. Counsel that, none of the plant and machinery installed by the assessee for setting up of a new industrial unit has been funded by the Government subsidy. The subsidy here in this case is not specifically intended to subsidies the cost of capital or plant & ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 44 - machinery. The incentive in the form of subsidy by the government here in this case cannot be considered as payment directly or indirectly to meet any portion of the actual cost and hence it does not fall within the purview of Explanation 10 to section 43(1). Thus, this alternative plea as raised by Ld. AO is rejected. Accordingly, the ground raised by the revenue on this score stands dismissed. 5.3. We have heard rival contentions and perused the material on record including cited case laws, orders of the authorities below and factual matrix of the case. We have also gone through the terms & condition of the said incentive scheme formulated by Central and State Government to grant Central Excise benefits by way of refund and exemption of Sales Tax Incentive as are extracted by learned CIT(A) in his appellate order which are reproduced above in the preceding para’s of this order We have observed that the assessee is engaged in the business of manufacturing of Terry Towels. We have observed that there was a devastating earthquake in District Kutch in Gujarat on 26.01.2001. In order to redevelop and rehabilitate the said Kutch District of Gujarat , the Central and State Government formulated policy with a view to encourage setting up of new industry in said Kutch District wherein certain incentives by way of refund of excise duty as well exemption of Sales Tax incentives were given by Central and State Government to the entrepreneurs for setting up new industry in Kutch District ,as detailed below:- “NOTIFICATION NO 39 /2001 -CENTRAL EXCISE. In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), read with subsection (3) of section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 45 - (58 of 1957) and subsection (3) of section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 ( 40 of 1978), the Central Government being satisfied that it is necessary the public interest so to do, hereby exempts the goods specified in the First Schedule to the Central Excise Tariff Act,1985 (5 of 1986) other than goods specified in the Annexure appended to this notification and cleared from a unit located in Kutch district of Gujarat from so much of the duty of excise or the additional duty of excise, as the case may be, leviable. The exemption contained in this notification shall be subject to the following conditions, namely;- (i) It shall apply only to new industrial units, that is to say, units which are set up on or after the date of publication of this notification in the Official Gazette but not later than the 31st day of December, 2004; (ii) In order to avail of this exemption, the manufacturer shall produce a certificate from a Committee consisting of the Chief Commissioner of Central Excise, Ahmedabad and the Principal Secretary to the Government of Gujarat, Department of Industry, to the jurisdictional Assistant Commissioner or the Deputy Commissioner of Central Excise, as the case may be, that the unit in respect of which exemption is claimed is a new unit and has been set up during the time period specified in condition (i) above. (iii) Before effecting clearances under this notification, the manufacturer shall also furnish a declaration regarding the original value of investment in plant and machinery installed in the factory as on the date of commencement of commercial production, to the Assistant Commissioner the Deputy Commissioner of Central Excise, as the case may be. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 46 - (iv) The manufacturer shall also produce a certificate from the said Committee confirming the original value of investment and such a certificate shall be produced within a period of one month from the date of commencement of commercial production, or such extended period as the said Assistant Commissioner or Deputy Commissioner may allow. (v) In case on the basis of such certification, or otherwise, the original value of investment in plant and machinery, (a) is found to be less than rupees twenty crore but was declared to be rupees twenty crore or more, the manufacturer shall be liable to pay back the entire amount of duty exemption availed under the notification alongwith interest at the rate of twenty four per cent per annum as if no exemption were available; or (b) is found to be less than the declared value and was declared to be below rupees twenty crore, the manufacture shall be liable to pay duty on the goods cleared ,if any, in excess of twice the actual value of original investment in each of the years during which exemption has been claimed under this notification alongwith interest at the rate of twenty four per cent per annum , as if no exemption were available to those clearances under this notification. (vi) The exemption shall apply for a period not exceeding five years from the date of commencement of commercial production by the unit. The sales tax incentive scheme formulated by State Government of Gujarat is detailed hereunder: SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH DISTRICT The economic activities in the district of Kutch came to a standstill on account of devastating earthquake in the ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 47 - State on 26th January, 2001. New employment opportunities could be created if new investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption to new industries to promote large scale investment in the district, along with which the State Government has also decided to announce the scheme of sales tax incentive. Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch district. Conditions Under this scheme, following conditions shall be applicable to sales tax incentives. In the case of violation of one or more conditions, the amount of sales tax incentives availed of shall be recovered as arrears of land revenue. (a) The industrial unit shall have to give a clear undertaking that it shall not transfer or dispose of the assets in any manner, till the expiry of the eligibility period of incentives. (b) The industrial unit availing of the incentives under the scheme, shall have to install, effectively use and maintain the pollution control equipments as per the standards prescribed and approved by the competent authority. (c) The industrial unit shall have to continue production up to the period of eligibility. However, if the unit does not remain in continuous production on account of the reasons beyond the control of the management, the unit shall present its case before the State Level Committee as an individual case on which the committee can take decision to waive the period of discontinuation of production based on the representation made. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 48 - (d) The industrial unit shall have to furnish the details of production, employment and other information every year before 30th June or from time to time as sought by the State Government. (e) As per the employment policy of the Government of Gujarat, the unit availing of the incentives, will have to recruit local persons for a minimum of 85% of the total posts and for a minimum of 60% of the managerial and supervisory posts. The unit shall have to submit the details of fulfilling the conditions of local employment to the concerned authority granting the incentives to his satisfaction. The percentage of the above mentioned employment will have to be maintained by the industrial unit during the eligibility period of the incentives. Otherwise, the amount of incentives availed by the unit can be recovered as arrears of land revenue (f) Unit will have to invest the amount equivalent to 50% of the sales tax incentives availed in the new projects in the state within a period of 10 years from the date of commencement of commercial production. (g) Unit opting for sales tax deferment scheme for the purpose of deferred amount shall have to give a personal undertaking in the form of security bond as prescribed vide Resolution No.INC-1087-2138-I dated the 1st August, 1990 or equitable charge, second charge. h) The unit availing of incentives under any other scheme of the State Government will not be eligible to receive benefits under this scheme. (i) Expansion, diversification or modernization of the existing industries will not be considered eligible for the benefits under this scheme ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 49 - We have also observed that the Mumbai-tribunal has dealt with this incentive schemes of Central and State Government for giving incentives by Central Excise Benefits by way of refund and exemption of Sales Tax Incentives for setting up industrial units in District Kutch,Gujarat to redevelop the said Kutch District in the wake of devastating earth quakes on 26.01.2011 in the cases of group concern of the assessee in Welspun Steel Ltd. v. DCIT/ACIT, vide appellate order dated 18.12.2015 , in appeals in ITA no. 7630/Mum/2011 and 8294/M/2011 for AY 2007-08, ITA no. 6371/Mum/2014 for AY 2006-07, ITA no. 6372/Mum/2014, 6304/Mum/2014 for AY 2007-08, ITA no. 6373/Mum/2014, 6305/Mum/2014 for AY 2008-09, ITA no. 6374/Mum/2014, 6306/Mum/2014 for AY 2009-10, ITA no. 6375/Mum/2014, 6307/Mum/2014 for AY 2010- 11, ITA no. 6376/Mum/2014, 6308/Mum/2014 for AY 2011-12, vide common order dated 18.12.2015 , wherein the Mumbai tribunal has held that the said incentives are capital receipt not exigible to income-tax and further it has been held that the said amount of incentives received by the asseseee shall not be reduced from the cost of the asset of the assessee despite explanation 10 to Section 43(1) , by holding as under “5. The brief facts qua the issue involved is that, assessee is engaged in the business of manufacturing of sponge Iron, Steel Ingots and rolled product. In the wake of devastating earthquake in Kutch District, Gujarat, the Central Government, vide notification No. 39/2001 dated 7th August, 2001 issued an excise benefit incentive scheme and State Government of Gujarat also vide its Notification dated 9th November, 2001 announced an incentive scheme for Sales-tax exemption known as ―Incentive Scheme, 2001 for Economic Development for Kutch District‖. Both these schemes were for setting-up of ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 50 - a new industrial unit/s in Kutch District after complying with the terms and conditions as set out in the notifications and schemes of the Central and State Government respectively. The object of both the schemes was economic development of Kutch District after the earthquake and creation of new employment opportunities and attraction of large scale investments. During the previous year, the assessee had received following incentives by the State government and Central government:- (i) Sales-tax incentive -Rs. 12,95,99,499 (ii) Central Excise benefit -Rs. 22,37,23,672 Total -Rs.35,33,23,171 The amount of incentive received was credited to the profit and loss account, however, the assessee claimed that the said receipts are not taxable as they are capital receipts. The AO while making the assessment has rejected the claim of the assessee on the ground that in the assessment year 2006-07, the assessee‘s claim was rejected by the AO on the ground that the decision of Special Bench in the case of Reliance Industries is pending for disposal before the Hon‘ble Bombay High Court. 6. The Ld. CIT(A) too following the decision of Bombay High Court in the case of Reliance Industries, allowed the assessee‘s appeal. However, later on, this decision of the Hon‘ble Bombay High Court has been set aside to the Tribunal for fresh adjudication. 7. Before us, it has been stated that this issue of subsidy / incentive in the case of the assessee had reached to the stage of ITAT, whereby the Tribunal, vide I.T.A. No.5373 to 5376/Mum/2015 I.T.A. No.5718, 5721, 5723 and ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 51 - 5725/Mum/2015 28 order dated 28.12.2011 had set aside this issue to the file of the AO on the ground that authorities below have not analysed the scheme of subsidy / incentive granted by the respective governments. It has been informed that, till date no assessment order has been passed in pursuance of Tribunal order. Instead a fresh assessment order has been passed under section 143(3) r.w.s. 153A wherein this issue has been confirmed by the AO again without proper analyzing the ̳purpose test‘ of the scheme. 8. The Ld. Counsel for the assessee submitted that, now there is catena of decisions not only of the Tribunal but also of the various High Courts including that of the jurisdictional High Court, in favour of the assessee that if the subsidy is given for setting up for a new industrial unit or plant then it is on capital account. In support of this contention a separate compilation of case laws have been filed before us. Explaining the nature of scheme, he submitted that the fundamental object for both the schemes was to set up an industrial plant for economic development and creation of new employment opportunities. From the perusal of these schemes which have been placed in the paper book from pages 35 to 47, he submitted that it can be seen that they were purely for assisting the entrepreneur for setting-up new industrial units and not for running of any industry for profit. He refer to preamble as given in the ―Incentive Scheme of 2001 for Economic Development of Kutch District‖ issued by Government of Gujarat dated 09.11.2001. Even in the Central Excise Notification, the same was issued in a public interest for setting up of a new industrial plant and the incentive of Excise Duty benefit was given for a period of five years. He further submitted that the nature of incentive under both the notifications and the accounting ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 52 - treatment by the assessee as stated by the assessee before the authorities below was as under:- (a) The nature of incentives under the Notification and the Scheme and the present accounting treatment are summarized as under:- (a) Excise Duty (in view of the Notification) - Refund of the excise duty paid through PLA on finished goods cleared from the unit after taking Cenvat credit on the inputs. This amount is credited to the profit and loss account as 'Excise Benefit Received and inadvertently offered to tax. Presently, there is no limit for the quantum of such incentive. (b) Sales Tax/Value Added Tax (in view of the Scheme) - Purchase of inputs without sales tax and sales without charging of sales tax thus, claiming exemption. However, after the introduction of VAT, refund of VAT paid on inputs and remission of VAT collected on sales is available. Both these components are credited to the profit and loss account as 'Sales Tax Incentives Received' and inadvertently offered to tax. There is a monetary limit specified for the quantum of this incentive linked to investment that is eligible under the Scheme. (c) The incentive can be availed of only after commencement of production. Further, in so far as it relates to the incentives under the Scheme, the unit has to invest at least 50% of the incentives in the State of Gujrat within a period of 10 years from the date of commercial production. Thus, he submitted that, looking to the objects and the purpose for which subsidy was given, the incentive receipts has to be treated as capital. In support of his contention, besides several decisions, he placed reliance on the following decisions:- ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 53 - 9. Ld. Counsel further pointed out that in the case of the assessee, a search and seizure action had taken place on 30.10.2010 in Welspun Group of cases and in pursuance of that notice u/s 153A was issued for the impugned assessment years. The Ld. AO besides treating the said incentives as revenue receipts had taken an additional point by way of an alternative observation that in case, the said receipts are treated as capital receipts, then same shall be reduced from the costs of assets and depreciation claimed on the net cost of the assets will be allowed after reducing the amount of incentives in terms of Explanation 10 to section 43(1). He submitted that such a contention of the AO cannot be upheld, because the same is not applicable in the present case at all, because there is no direct acquisition of asset from the Government subsidy. The subsidy is received in the form of excise tax benefit and sales-tax incentive only when the assessee had set up the whole industrial unit and starts manufacturing and commenced its business of sale. Thus, the said provision is not applicable and in support of his contention, he relied upon the following Tribunal decisions:- 10. On the other hand Ld. DR strongly relied upon the assessment order especially passed by the AO under section 143(3) r.w.s. 153A dated 25.03.2013 and submitted that, if the incentive/ subsidy has been given in the form of sales-tax or exemption of excise duty then it directly leads to augmentation of profit of the assessee and hence, it is nothing but revenue receipts. 11. We have carefully considered the rival contentions and also perused the relevant material placed on record. The main issue involved is, whether the incentive / subsidy provided by the State Government in the form of sales-tax incentive and in the form of Central Excise benefit by the Central Government for sums aggregating ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 54 - to Rs. 35,33,23,171/- is to be treated as capital receipts or revenue receipts. The Hon‘ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd vs CIT, reported in [2008] 306 ITR 392 after referring to the earlier decisions of the Supreme Court in the case of Sahney Steel Works Ltd v CIT, reported in [1999] 228 ITR 253, held that the ―purpose for which subsidy is given is the crucial factor‖. The purpose is to be judged from the character of the receipts in the hands of the assessee which has to be determined with respect to the purpose for which the subsidy is given. The point of time is not relevant and also the source and the form of subsidy is immaterial. If the subsidy has been given to setup new units or for substantial explanation of existing units, then it is a capital receipt. 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. The relevant observation of the Hon‘ble apex Court in this regard given in para 14 reads as under:- 14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel & Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the. capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of. refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 55 - a special leave petition. It was held by this Court on the facts of that case and on the basis Of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel & Press Works 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 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 setup 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 ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 56 - 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‖. 12. Now, in the wake of the principle laid down by the Hon‘ble Supreme Court, we shall examine the nature of subsidy provided to the assessee. The ―Incentive Scheme 2001 for Economic Development of Kutch District of the Gujarat Government‖ gives the fundamental preamble which highlights the basic objective and the purpose for which the incentive by the State Government as well as Central Government is being given has been highlighted in the following manner:- “The economic activities in the district of Kutch came to a standstill on account of the devastating earthquake in the State on 26th January, 2001. New employment, opportunities could be created if new Investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption for new industries to promote large scale investment in the district, along with which the State Government has also decided to announce the scheme of sales tax incentives. Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch district 13. From the perusal of the above, it is amply clear that the schemes launched was for setting up of new industries in the district of Kutch for the purpose of new employment opportunities and to make industrial and ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 57 - economic environment live. Thus, the scheme of incentives provided by the respective Governments was setting-up of a new unit and not for running of the business more profitably. As laid down by the Hon‘ble Supreme Court, the form and the source of subsidy are immaterial and what is material is whether the subsidy is for setting up for a industrial unit or running it for profitability. Similarly, the Central Excise exemption was given in the public interest for setting up of a new industrial unit in the Kutch District. Accordingly on the facts of the present case, we conclude that the incentive given by the State Government and the Central Government is nothing but capital receipts, because applying the ―purpose test‖ the incentive / subsidy was given only for setting up of new industrial unit and economic development and generation of new employment opportunities in the Kutch District and not for running the industry for augmenting the profit on day-today business. This proposition of law has been reiterated by the Hon‘ble Bombay High Court in the case of CIT vs Chaphalkar Brothers, reported in 351 ITR 309, wherein the Hon‘ble High Court relying upon the principles laid down by the Supreme Court in the case of Ponni Sugars & Chemicals Ltd has held that if the object of the subsidy was to promote construction of multiplexes, theater complexes then, it would be on capital account. Similarly, views have been taken by the various other High Courts and Tribunal in the decision as referred and relied upon by the Ld. Counsel as above. Thus, We hold that the amount of incentive received by the assessee cannot be taxed as revenue receipt as it is purely on capital account. 14. As regards the other plea raised by the AO in the order passed u/s 143(3) r.w.s. 153A, we agree with the contention of the Ld. Counsel that, none of the plant and machinery installed by the assessee for setting up of a ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 58 - new industrial unit has been funded by the Government subsidy. The subsidy here in this case is not specifically intended to subsidies the cost of capital or plant & machinery. The incentive in the form of subsidy by the government here in this case cannot be considered as payment directly or indirectly to meet any portion of the actual cost and hence it does not fall within the purview of Explanation 10 to section 43(1). Thus, this alternative plea as raised by Ld. AO is rejected. Accordingly, the ground raised by the revenue on this score stands dismissed. We are in agreement with the aforesaid decision of the tribunal dated 18.12.2015 in the case of Welspun Steel Ltd(supra) as the said incentives by way of excise duty refund and sales tax incentives were given to encourage setting up of new industrial unit in Kutch District to redevelop the Kutch District in the wake of devastating earthquake on 26.01.2001 albeit the said incentives are given post commencement of manufacturing and the said subsidy shall be capital in nature as it is for promoting setting up of new industry in Kutch District which was devastated by earthquake even if the subsidy is given post commencement of commercial production by way of refund of Central Excise and Exemption of Sales Tax which is not material keeping in view purposive test and the fact that the said incentives were given to encourage making capital investments in Kutch District in setting up new industry to redevelop the Kutch District post devastating earthquakes on 26.01.2001. We also note that Special Bench decision of the Mumbai-tribunal in the case of Reliance Industries Limited(supra) was upheld by Hon’ble Bombay High Court in CIT v. Reliance Industries Limited (2011) 339 ITR 632(Bom.) by holding that no substantial question of law would arises as the object of the subsidy was to set up a new unit in a backward area ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 59 - to generate employment but aforesaid decision of Hon’ble Bombay High court has been set aside by Hon’ble Supreme Court in Civil Appeal Number 7769 of 2011 ( arising out of SLP (C) No. 9860 of 2010) dated 09.09.2011 and the matter is remitted back to Hon’ble Bombay High court to decide the question of law framed thereon in accordance with law. This revives the Special Bench decision of the tribunal in the case of Reliance Industries Limited(supra) , which has already held that subsidy which is given for setting up or expansion of industry in a backward area , will be capital in nature, irrespective of modality or source of funds through or from which it is given. Thus, following the ratio of decision of co-ordinate Benches of the tribunal in the case of Welspun Steel Ltd(supra) , we hold that Central Excise benefit and Sales Tax incentive received by the assessee during the impugned assessment year under consideration, are capital receipts not exigible to income-tax and further we hold that the same shall not be deducted from cost of assets for computing depreciation. The ground number 1 and 2 raised by the Revenue in its memo of appeal filed with the tribunal are dismissed. We order accordingly.” 21. In this view of the matter and consistent with view taken by the co-ordinate bench and also, considering the facts that the jurisdiction High Court of Bombay has upheld the findings of the Tribunal, in the case of M/s.Welspun Steel Ltd. vs CIT in ITA NO. 1743/2016, vide order dated 26/02/2019, we are of the considered view that there is no error in the findings recorded by the Ld.CIT(A), while deleting additions made by us Ld. AO towards sales tax incentives and excise duty benefits received by the assesee. Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the revenue. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 60 - We find the facts of the present case are identical to the earlier years and we respectfully fallow the judicial precedence and dismissed these grounds of appeal of the revenue. 18. The third and forth disputed issue that the CIT(A) erred in deleting the depreciation on fixed assets u/s 40(a)(ia) r.w.s37(1) of the Act in respect of capitalization of professions fees, expenditure, FCCB premium and FCCB expenditure. The CIT(A) has dealt on these issues at Para No. 10 to 10.4 of the order and granted the relief as under: 10. The sixth ground relates to disallowance of depreciation on certain expenses which have been capitalised as these expenses were not allowable expenses and the appellant has claimed depreciation on these amounts. 10.1 In making assessment for the A.Y.2005-06 the ld. AO disallowed depreciation in respect of following expenses debited to fixed assets under the head Pre- operative expenses:- (a) Capitalisation of Professional fees 16,99,543/- (b) Capitalisation of certain expenses 21,05,829/- (c) FCCB Premium * 13,48,619/- (d) FCCB Issue expenditure 1,10,98,792/ 10.2 The issue emanates from the assessment for AY 2005-06 wherein the first disallowances have been made. It is seen that the above addition was made while ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 61 - passing the assessment order dated 26/3/2013 for AY 2005-06 on account of an order u/s 263 passed by CIT-7, Mumbai on 30/3/2010. In his order, the CIT-7 had observed that the pre-operative expenses which had been disallowed u/s 40(a)(ia) were capitalised by the appellant and a depreciation claim has been made on these items. As per him, this was an indirect route to claim these amounts as deduction and hence no depreciation could have been allowed to the appellant. Subsequently, the order u/s 263 has been quashed by the ITAT in ITA No. 3374/Mum/2010. However, since there was a search action in the case of the appellant and a fresh order u/s 143(3) rws 153A was to be passed, the AO incorporated the issues which had been dealt with by the CIT-7 in his order. 10.3 of Income Ta The additions in subsequent years, including the present year are similar. It is seen that the issue has already been decided by my predecessor for AY 2005-06, AY 2006-07 and AY 2007-08. The CIT(A)-51, Mumbai has elaborately dealt with this issue in his order for AY 2005-06 before deciding the issue in favour of the appellant. The CIT(A) has relied on the decision in the case of Mark Auto Industries Ltd, 12 taxmann.com 259 (P&H) and SKOL Breweries Ltd, 29 taxmann.com 111 (Mum) to hold that depreciation is a statutory deduction and hence provisions of section 40(a)(ia) do not apply to such deduction. Respectfully following the decision of CIT(A)-51 on this issue, I allow the ground raised by the appellant. 10.4 With respect to the expenditure on FCCB premium and depreciation on FCCB issue expenditure, the CIT(A) - 51 has held them to be expenditure in the nature of business allowable by treating the same to be cost of finance till conversion of these bonds into equity. He has relied on the decision in the case of Mahindra & Mahindra ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 62 - Ltd 24 taxmann.com 267 (Mum) for his decision. Respectfully following the decision of CIT(A)-51 in earlier years on the same issue, I direct the AO to allow depreciation on the capitalised amounts. The ground raised by the appellant is accordingly upheld. However, it is seen that the assessing officer has allowed the entire disallowance made earlier as the appellant has offered the entire amount of FCCB premium to tax in its year of conversion. The AO should ensure that there is no double deduction allowed to the appellant on account of this relief. 19. The Hon’ble ITAT has considered these facts in the assessee’s own case for the A.Y 2007-08 (supra) and has observed at page 32 Para 22 to 26 of the order as under: 22. The next issue that came up for our consideration from ground No.4 of revenue appeal is disallowance of depreciation on fixed assets u/s 40(a)(ia) r.w.s 37(1) of the Act, under different categories on the plea that the deprecation was disallowed in the AY 2005-06. The Ld. AO has disallowed depreciation for non deduction of tax at source on certain payments, which are capitalized to fixed receipts, like, professional fees, FCCB premium and FCCB issue expenditure. The Ld.CIT(A) has deleted the additions made by the Ld.AO by following his predecessor appellate order for AY 2005-06. 23. The Ld. AO for the assessee, at the time of hearing submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai in assessee own case for Asst. year 2005- 06 in ITA.No.3375/Mum/2010 and also ITA No.5371/Mum/2015 for AY 2005-06, where the Tribunal ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 63 - under identical facts deleted addition made by the AO towards disallowance of depreciation on fixed assets. 24. We have heard both the parties and perused the material available on record. We find that the issue is with regard to disallowances of depreciation on fixed assets, in respect of certain expenditure capitalized for non deduction of tax at source was considered in AY 2005-06 in u/s 263 proceedings in ITA No. 3375/Mum/2010. We, further noted that although, the Tribunal has quashed 263 proceedings, but not discussed the issue on merits. Subsequently, in 153A assessments, the Ld. AO has made similar additions. But, the ITAT has deleted said additions in ITA No. 5371/Mum/2015, on technical ground without discussing the issues on merits. Therefore, it is necessary to examine the issue on merits, whether the claim of the assessee with regard to depreciation on fixed assets, in respect of that expenditure for non deduction of tax at source is in accordance with law. The provisions of section 40(a)(ia) of the Act, is applicable, where any expenditure is debited into profit and loss account without deduction of tax at source, then to that extent, the expenditure on which TDS was not deducted is not allowable as deduction. Similarly, if any amount as capitalized to fixed assets and depreciation was claimed thereon, if no TDS is deducted, in respect of those capitalized fixed assets, then depreciation to that extent is not allowable. The Ld. AR for the assessee has failed to bring on record any evidence to prove that whether, the claim made, in respect of depreciation on fixed assets, in respect of those expenditure is in accordance with provision of section 40(a)(ia) of the Act. Therefore, we are of the considered view that the issue needs to go back to the file of Ld.AO for verification of facts with regard to applicability of provision of section 40(a)(ia) of the Income Tax Act,1961. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 64 - Hence, we set aside the issue to file of the Ld. AO and direct him to reconsider the issue in accordance with law. 25. The next issue that came up for our consideration from ground No.6 and 7 of revenue appeal is disallowances of FCCB premium and depreciation on FCCB premium debited to pre-operative expenses. The Ld. AO has disallowed said expenditure, on the ground that the assessee has created only a provision, even though the bond holders have not exercised their option during the year under consideration. The Ld.CIT(A) has deleted additions by following his predecessor appellate order for AY 2005-06. Further, although the appeals for AY 2005- 06 has been decided by the Tribunal in ITA No.5371/um/2015, but the issue has not been discussed on merits, because the Tribunal has quashed assessment order on technical grounds. Therefore, it is necessary to discuss the issue on merits, in light of facts brought out by the Ld. AO during the year under consideration. It is the case of the Ld.AO that FCCB premium and FCCB issue expenditure are only a provision, which is not crystallized during the year under consideration, because the bond holders have not exercised their option. It s the claim of the assessee before the AO is that although, the expenditure has been debited to profit and loss account, when provision is created in respective years, but when the option was exercised, the same has been offered to tax in AY 2008-09. In this regard, the assessee has filed statement of total income relevant assessment year 2014- 15 to prove that reversal of provision was offered to tax for Asst. year 2014-15. 26. We have heard rival contention of both parties and considered materials on record. We find that initially, the assesse has debited provision towards FCBB premium and FCBB issue expenditure, even though the bond holders have not exercised their option. Further, if any ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 65 - expenditure is debited to profit and loss account by creation of provision and such liability was not crystallized, then obviously, the same cannot be allowed as deduction, and therefore to that extent, the findings of Ld. AO is correct. However, the fact remains that assessee claims to have offered the same for taxation for AY 2014-15, when the bond holders have exercised their option. In this regard, he has filed a copy of statement of total income, where FCCB premium paid on conversion of bonds into equity shares have been disallowed in the statement of total income. But, the facts with regard to the availability of these evidences before the Ld. AO at the time of assessment proceedings are not clear. Hence, we are of the considered view that the issue needs to go back to the file of the Ld. AO to ascertain the fact with regard to the claim of the assesee that said expenditure has been suffered to tax in AY 2014- 15. Hence, we set aside the issue to the file of the Ld. AO and direct him to cause necessary enquiries and if he is found that the said amount has been offered to tax in AY 2014-15, then the additions made for the year under consideration needs to be deleted. 20. Further we found that in MA 100/M/2021 dated14-7-2021, the Honble Tribunal has considered the facts and dealt on this issue at Para 3.2 and held that the expenditure was incurred for the A.Y 2005-06 and depreciation was allowed by the A.O. therefore for A.Y.2007-08 is only consequential year of allowing the depreciation and the expenses falling U/sec40(a)(ia) of the Act. Accordingly we follow the ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 66 - judicial decisions and dismiss the grounds of appeal of the revenue. 21. The last ground of appeal challenged were the CIT(A) has erred in holding the Corporate guarantee fees charged @ 1.5% by the assessee to its AE is considered as ALP. We find that the CIT(A) has dealt on the facts, circumstances on the issue of charging of the corporate guarantee fee and granted relief observing at Para 11.9 to 11.15 of the order as under: 11.9 The appellant has extended unconditional and irrevocable corporate guarantees on behalf of its AE WPI, USA to three banks a) On 11-12-2007 with Bank of India, New York Branch for credit facility of US $ 10 million. b) On 29-1-2008 with Exim Bank, Mumbai for credit facility of US $ 50 million. c) On 10-12-2007 with State Bank of India, Mumbai for credit facility of US $ 20 million. The Appellant did not charge guarantee fees to WPI in the F.Ys.2007-08 and 2008-09, the Appellant has charged the guarantee fees @ 1.5% for these years retrospectively during the FY 2009-10 when WPI started earning profits. The basis for determining the rate of 1.5% was that the appellant itself had paid a guarantee fee of 0.5%. During the period under consideration, WCL had paid bank guarantee charges of 0.50 per cent per annum to Bank of Baroda, Ballard Pier Branch for availing guarantee facility from independent banks for a period of less than ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 67 - three years. However, WPI had availed loan facility for more than three year and since there was no benchmark available for the corporate guarantee charges where the loan availed is for the duration of more than three years, accordingly, I per cent charge over and above the 0.5 per cent charged by the bank / financial institution i.e. 1.5 per cent for the loan availed by WPI for a period of more than three years was considered to be reasonable and at arm's length. 11.10 The TPO did not accept the claim of the appellant that the corporate guarantees were in the nature of shareholder activity and that the assessee was not in the business of providing guarantees. The TPO held that the provision of guarantee constituted a business facility/ provision of service extended by one party to another which should carry compensation at arm's length. He held that at an arm's length, the party extending guarantee expects financial compensation in the form of guarantee fee, considering the risks and costs involved for the assessee. He also held that a bank guarantee could not be taken as a CUP in case of a corporate guarantee as the banks, being in the business of giving guarantee, cover their risks from multiple customers and hence the risk, in the case of the appellant, was much higher. The TPO also differentiated a BG from a CG by holding that in case of invocation of a BG, all expenses are recovered from the defaulting party and the party is treated as a debtor till all outstanding amounts are paid while there is no such provision in a CG. 11.10.1 The TPO also differentiated the case of the appellant from the case in Everest Canto Cylinders Ltd. by holding that the credit rating of the appellant was much better, the financial Neverage of the appellant has increased because of the guarantee given to the AE and that the increased risk required arm's length ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 68 - compensation. 11.10.2 Accordingly, the TPO adopted yield approach / interest saving approach for computing the benefit accruing to the AE on account of guarantee given by the appellant. In absence of any financial credit rating in respect of the AE, the TPO examined the financials of the arrive at a conclusion that the company was financially weak and had a eroded net worth as evident from the loss and concluded that the risk of lending and default in respect of WPI was very high. Based on the S&P's corporate rating criteria, he gave a credit rating of 'CC' to WPI which indicates a company highly vulnerable to non-payment. This is a grade just above bankruptcy grade. Relying on the GE Canada case, the TPO allowed a one grade upgradation to factor passive association benefit to the AE. So the credit rating of WPI was arrived at CCC. The Indian company was given a credit rating of A+. The TPO found out the corporate bond yields of BB- rated bonds (as bond yield of CCC rated paper was not available), computed average rates for the year. Similarly, he found out the corporate bond yield of A+ rated paper and computed average yield for AY 2007-08. The difference between the yield of two type of papers was taken to be the benefit accruing on account of corporate guarantee and was computed at 4.2169. The TPO allowed some benefit to the AE on this interest saving and distributed the total gain in a 60:40 ratio. Accordingly, the benefit attributable to the appellant was computed at 3.092%. Accordingly, the TPO held that the appellant should have received compensation at a rate of 3.092%. Before me, the appellant has objected to the benchmarking exercise carried out by the TPO. It has made a number of submissions which are summarised below; ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 69 - 11.11.1 A corporate guarantee is a guarantee given by a corporate to cover its own exposure or exposure of some other related party, to the bank; whereas a bank guarantee is given by a bank on behalf of its customer/applicant to the beneficiary of bank, that in case of non- happening of the particular event which is being covered by that particular guarantee, the bank will pay the beneficiary an amount, which is mentioned in the guarantee. It shows that there is no major difference between a corporate guarantee and a bank guarantee. Both these guarantees are financial in nature and the lenders derive an additional comfort from such guarantees when they do lending to particular borrower. 11.11.2 During the period under consideration the Appellant had paid bank guarantee charges @ 0.50% pa to Bank of Baroda, Ballard Pier Branch for availing guarantee facility from independent bank for a period of less than 3 years. In view of availability of internal comparable transactions, the Appellant selected CUP method as most appropriate method for benchmarking the international transaction of guarantee commission. In order to factor in the fact that the guarantees given by the appellant do not have any duration, a 1% increase has been effected to the above CUP. A 1% charge over and above the 0.50% charged by the bank /financial institution i.e. 1.5% for the loan availed by WPI for a period of more than three years can be considered to be reasonable and at arm's length. 11.11.3 The appellant has further contended that though the corporate guarantee transactions have been benchmarked by the application of CUP method, by applying internal comparable uncontrolled transactions; the Appellant would like to reiterate that it is not engaged in business of giving guarantees and this transaction should be looked upon as a shareholder function and not ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 70 - as a service function. If this perspective is kept in mind then the transaction can also take upon the garb of it being quasi-equity in nature, as it saved the company from investing its own or borrowed funds for funding its subsidiary and allowed the Appellant to leverage upon its inherent financial strength of having a robust balance sheet. It is relevant to note that WPI had hypothecated its assets and no cost was incurred by the Appellant for providing corporate guarantees to the bank for loans to its subsidiary. 11.11.4 Appellant neither incurred any cost for providing the guarantees to WPI nor has undertaken any kind of risk as it was the subsidiary company which hypothecated its assets against the loans and the Id. TPO has not brought anything on record to controvert the same and he proceeded on the premise that there is always a risk in providing a guarantee. The Appellant company is holding 100% equity of the WPI. Hence all the assets unless exclusively charged or mortgaged belongs to the holding company. Further guarantee given to the bank have a clause that the said guarantee can be invoked only after the charged assets have been liquidated. 11.11.5 The appellant relied on the decision of ITAT in the case of Everest Kanto Cylinder Ltd V/s. DCIT [TS-714- ITAT-2012(Mum)-TP] wherein the ITAT held that guarantee payment @0.6% to ICICI Bank India by the assessee could serve as a good internal CUP. It also relied on decision of ITAT, Delhi in the case of Bharti Airtel Ltd. V/s. ACIT 43 taxmann.com 150 (Del.) wherein the bench held that since corporate guarantee issued for benefit of AE does not involve any costs to assessee and it does not have any bearing on profits, income, losses or assets of enterprise, it has to be kept outside ambit of 'international transaction' to which ALP adjustment can be made. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 71 - The Ld. AR supported the order of the CIT(A) on this issue and contended that the assessee has given a corporate guarantee to AE and which does not involve any cost and no bearing on profits. Further the income or loss or assets of the AE are outside the purview of the international transaction. The Ld. AR has relied on the judicial decisions and the assessee has accepted the charge @ 1.5%. Contra, the Ld. DR could not controvert the findings of the Ld. CIT(A) on this disputed issue with any new cogent material or information to take a different view, accordingly we uphold the decision of the CIT(A) and dismiss the ground of appeal of the revenue. 22. In the result, the appeal filed by the revenue is dismissed. ITA No.5063/Mum/2016, A.Y 2009-10(Assessee) 23. As the facts, circumstances and the grounds of appeal no 1,2,4, in this assesee appeal are identical to grounds of appeal in ITA No.3890/Mum/2016 for A.Y.2008-09 (except the variance in figures). Therefore, the decision rendered in above paragraphs no.10,11&13 would apply mutatis mutandis for this ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 72 - appeal. The ground of appeal No. 3 raised by assessee as under: 3.a) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition of 3,03,24,000/- made by the AO to the income of the Appellant on account of unexplained investment in office property at Vasant Square, Vasant Kunj, New Delhi invoking the provisions of section 69B of the Income Tax Act, 1961. b) The ld. CIT(A) failed to appreciate that the Appellant has explained the nature and source of cash payment satisfactorily and as such no part of payments remained unexplained c) In reaching to the conclusion and confirming such addition, subject to The certain rectification, the ld. CIT(A) omitted to consider relevant factors, Mimi considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors 24. The contentions of the Ld.AR that the addition on account of unexplained investment in the office property which is only 40% of the value of the property. The source being cash received in the hands of Welspun Anjar SEZ Ltd on account of payment by Welspun Anjar SEZ ltd to M/s Shradha Sabari Merchants Ltd against certain accommodation bills of land development charges. However no expenditure on account of land development charges of the above ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 73 - amount was claimed or any depreciation on the same has been charged in the books of Welspun Anjar. The AO should have allowed the set off of funds available with the group company. it is logical and rational that cash received from the suppression of sales would be available for application unless it is shown that such cash was either utilized by the assessee for any other purposes or was spent. 25. In this case the AO has not doubted the availability of such cash with the Welspun group. Hence, the AO ought to have allowed set off of such cash available with the group . In the course of assessment proceedings the Assessee has clarified that theory of recycling of funds has been accepted by the Department since the same is logical and rational and the AO could not bring on record any material to show the cash received was out of any other income from undisclosed source. Therefore the telescoping is one type of technique by which one delinks all subsequent transactions or amounts which have merely rotated, recycled and converted from one into another. By this technique, a real income is to be determined. In support of its contention, reliance has been placed on the decision of Kishore Mohanlal ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 74 - Telwala V/s. Asst. CIT, 64 TTJ 543 (Ahd.) on the theory of preponderance of probability. 26. Similarly in Ananthram veerasinghaiah &Co Vs CIT (123 ITR 457 (SC) There can be no escape from the proposition that the secret profit or undisclosed income of an assessee earned in an earlier assessment year may constitute a fund even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books and other legal decisions are as under ii).CITV/S. K.S.M. Guruswamy Nadar & Sons, 149 ITR 127 (MAD) It was held that when two separate additions are made, one on account of suppression of profit and another on account of cash credits, it is open to the assessee to explain that the suppressed profits had been brought in as cash credits and one has to be telescoped into the other resulting into one addition. iii). CIT, Poona V/s. Jawanmal Gemaji Gandhi, 151 ITR 353 (BOM) It was held that secret profits or undisclosed income of an assessee earned in an earlier assessment year can constitute a fund, though concealed, from which the assessee may draw subsequently. In the instant case the assessee acquired gold during the latter half of the assessment year and it could be that the undisclosed income earned in that year constituted a fund from which the asset was acquired. iv. CIT V/s. Venkateswara Timber Depot, 222 ITR 768 ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 75 - The Appellate Tribunal was justified in law in telescoping the unexplained credits with the estimated addition to the business income towards deficiency in gross profits. v. Karanveer Singh Bawa V/s. ACIT (ITA No.2076, 2077, 2078 and 2080/Mum/2010) vi. Kirit V. Patel V/s. Department of Income Tax (ITA No.45/Ahd/2009) vii. Yogesh Thakkar V/s. DCIT (ITA No.3372, 3373 and 5745/Mum/2010) According to the assessee, the telescoping set off is well accepted by the Department. It has submitted that the facts and circumstances of the case are so apparent and obvious that they deserve such set off more particularly when the Assessing Officer could not prove. Further as per the information, the cash has been generated in the hands of the group company and there is no investigation by the AO or nothing was brought on record to substantiate that the claim has been not utilized in the hands of the group company. Therefore considering the doctrine of the telescoping of the funds available for the purchase of property and the ratio of judicial decisions, we direct the AO to consider the amount has been generated in the hands of the group company as mentioned and also the cash balances were available. Accordingly, we direct the AO to allow the benefit of telescoping as discussed and allow the ground of appeal. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 76 - 27. In the result, the asssessee appeal is partly allowed for statistical purpose. No. 5483/Mum/2016, A.Y 2009-10(Revenue) 28. As the facts, circumstances and the grounds of appeal in revenue appeal no 1,2,4,5,6,7 in this appeal are identical to grounds of appeal in ITA No.4364/Mum/2016 for A.Y.2008-09 (except the variance in figures). Therefore, the decision rendered in above paragraphs no.16,17,18,19,20,&21 would apply mutatis mutandis for this appeal also The ground of appeal No. 3 raised by the revenue as under: 3. On the facts and circumstances of the case and in Law, the Ld. CIT(A) erred in holding that for calculating disallowance u/s. 14A, interest received should be excluded without appreciating that interest / finance costs paid by the assessee which is directly linked to the income earning activities which are taxable in nature being directly linked to the business of the assessee particularly when the assessee maintains mixed pool of funds and the assessee has not maintained separate books of accounts for exempt income yielding investments and income yielding investments and also not established the nexus of borrowed funds and interest payment for income yielding investments and exempt income yielding investments". ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 77 - 28(i) We find the CIT(A) has dealt elaborately in the para 9.7 of the order and gave directions to the Assessing officer while computing rule 8D disallowances. whereas the Ld. DR could not controvert the findings of the Ld. CIT(A) on this disputed issue with any new cogent material or information to take a different view, accordingly we uphold the decision of the CIT(A) and dismiss the ground of appeal of the revenue. 29. In the result, the appeal filed by the revenue is dismissed. ITA.No.5165/Mum/2016(Assessee)A.Y.2010-11 30. As the facts, circumstances and the grounds of appeal no 1,2,4, in this assessee appeal are identical to grounds of appeal in ITA No.3890/Mum/2016 for A.Y.2008-09 (except the variance in figures). Therefore, the decision rendered in above paragraphs no.10,11&13 would apply mutatis mutandis for this appeal. The ground of appeal No. 3 raised by assessee as under: 3.a) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the action of the AO in restricting the deduction u/s.80IA(4)(iv) to ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 78 - 41,43,29,379/- only as against claim for such deduction of 53,45,29,379/- and thereby erred in confirming the addition of 12,02,00,000/- made by the AO to the income of the Appellant by way of disallowing certain part of deduction claimed u/s.801A(4)(iv). b) The Id. CIT(A) failed to appreciate that the Appellant has opted to claim deduction u/s. 80IA only in the A.Y. 2010-11 and as such there was no question of setting-off notionally carried forward unabsorbed depreciation or loss of earlier years against profits and gains of the unit and as such the Appellant was entitled to claim deduction u/s.80-IA(4)(iv) on current assessment year's profits and gains derived by the unit of generating power. c. In reaching to the conclusion and confirming such addition the ld. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors The assessee has opted to claim deduction u/s 80(IA) of the Act only in the A.Y 2010-11, though the first year of generation of power was in the earlier year and the A.O has disallowed the claim as the unabsorbed depreciation with respect to eligible unit be set off first in respect of claim.The Ld.AR mentioned that there is no necessity to notionally carry forward unabsorbed depreciation from earlier years set off against the profits and gains of units as such the assessee is entitled for deduction u/s ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 79 - 80IA(4)(iv) of the Act in the current year profits and gains in respect unit generating power. Whereas the CIT(A) has granted marginal relief on restricting the claim. The Ld.AR has highlighted on the facts and relied on submissions made before appellate authorities and the judicial decisions. (i)Mohan Breweries Vs ACIT(116 ITD 241(chenai) (ii)Shevie Exports Pvt Ltd Vs JCIT (340 ITR 477) (iii)Velayudhaswamy Spinning Mills (p) Ltd Vs ACIT(340 ITR 477) (iv)Sadbhavengineering Ltd Vs DCIT(153 ITD234((Ahd) (v) Jivraj Tea &Industrial Ltd VsACIT(62 SOT74)(Ahd) we considering the facts, circumstances, ratio of judicial decisions and the factual paper book are of the opinion that the assessee should not suffer for non filing of material information which was demonstrated and the Asessement order does not discloses these facts and computation of claim. Accordingly, to meet the ends of justice, we restore the disputed issue to the file of the Assessing officer to examine taking into consideration the facts and the judicial decisions ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 80 - as discussed and compute the claim and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information and we allow the ground of appeal of the assessee for statistical purposes. 31.In the result, the asssessee appeal is partly allowed for statistical purpose. ITA.No.5043/Mum/2016 A.Y.2010-11(Revenue) 32. As the facts, circumstances and the grounds of appeal in revenue appeal no 1,2,4,5,6,7 in this appeal are identical to grounds of appeal in ITA No.4364/Mum/2016 for A.Y.2008-09 (except the variance in figures). Therefore, the decision rendered in above paragraphs no.16,17,18,19,20,&21 would apply mutatis mutandis for this appeal also The ground of appeal No. 3 raised by the revenue is identical to A.Y.2009-10 and the decision rendered in above paragraph no.28(i) which apply mutatis mutandis and dismiss the grounds of appeal of the revenue. ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 81 - ITA No. 5044/Mum/2016, A.Y 2011-12(Assessee) 33. As the facts, circumstances and the grounds of appeal no 1,2,3, in this assessee appeal are identical to grounds of appeal in ITA No.3890/Mum/2016 for A.Y.2008-09 (except the variance in figures). Therefore, the decision rendered in above paragraphs no.10,11&13 would apply mutatis mutandis for this appeal also and partly allow the grounds of appeal for statistical purpose. ITA No. 5166/Mum/2016, A.Y 2011-12(Revenue) 34.As the facts, circumstances and the grounds of appeal in revenue appeal no 1,2,,4,5,6,7 in this appeal are identical to grounds of appeal in ITA No.4364/Mum/2016 for A.Y.2008-09 (except the variance in figures). Therefore, the decision rendered in above paragraphs no.16,17,18,19,20,&21 would apply mutatis mutandis for this appeal also The ground of appeal No. 3 raised by the revenue is identical to A.Y.2009-10 and the decision rendered in ITA.No,3890&4364/5063&5483/5165&5043/5166&5044/Mum/2016 M/s. Welspun Corp Ltd, Mumbai. - 82 - above paragraph no.28(i) which apply mutatis mutandis and dismiss the grounds of appeal of the revenue. 35. In the result, the appeals filed by the revenue are dismissed and the appeals filed by the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 29.03.2023. Sd/- Sd/- (PRASHANTH MAHARISH) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 29.03.2023 KRK, PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT (Judicial) 4. The PCIT 5. DR, ITAT, Mumbai 6. Guard File आदेशान ु सार/ BY ORDER, //True Copy// 1. ( Asst. Registrar) ITAT, Mumbai