M/S. EID PARRY INDIA LTD.,CHENNAI V. DCIT, LTU-1, , CHENNAI

ITTPA 105/CHNY/2024

AI Insights

The case involves multiple appeals by M/s. E.I.D. Parry India Ltd. against the orders of the Commissioner of Income Tax (Appeals) -16, Chennai, concerning transfer pricing adjustments and various disallowances under the Income Tax Act, 1961. The primary issues revolved around the arm's length price determination for corporate guarantees, disallowances under section 14A r.w. Rule 8D related to exempt income, and the treatment of forward contract losses and depreciation on alleged bogus purchases. The Tribunal's decision referenced several precedents and judicial interpretations, particularly focusing on the nature of the transactions and the appropriate legal framework governing them.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126820 (ITAT-CHENNAI)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 21-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Other Referred Cases: PCIT v. Redington (India) Ltd., Everest Kanto Cylinder Ltd. v. ACIT, Bharti Airtel and Redington (India) Limited, M/s. Sundaram Fasteners Ltd., M/s. Crompton Greaves Limited, M/s. Ashok Leyland, M/s. Mahindra Electric Mobility Ltd. v. ACIT, M/s. Sun Pharmaceutical Industries Ltd. v. PCIT, CIT v. Faizan Shoes, CIT v. Aztec Auto (P) Ltd., CIT v. Continuum Wind Energe (India) (P) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A. SASIKUMAR
• Assessee Lawyers: R. VIJAYARAGHAVAN
• Keywords: Set aside; Speculation loss; Revenue expenditure; Transfer pricing; International transaction; Depreciation; Additional depreciation; Bogus purchase; Capital expenditure; TDS; Accommodation entries; Earning of tax free income; Double taxation relief; Permanent establishment; Services rendered outside India; Rule 8D; Bogus
• Section: 143(2); 119; 250; 143(1); 48; 132; 131; 22; 13; 92CA; 69A; 37; 14A; 43(5); 144C; 37(1); 32(1)(iia); 35AB; 20

Judgement Text

"आयकर अपीलीय अिधकरण, ‘डी ’ ᭠यायपीठ, चे᳖ IN THE INCOME TAX APPELLATE TRIBUNAL‘D’ BENCH, CHENNAI ᮰ी जॉजᭅ जॉजᭅ के, उपा᭟यᭃ एवं ᮰ी एस.आर.रघुनाथा, लेखा सद᭭य के समᭃ BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENTAND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER IT(TP)A. Nos.:105, 106, 107/Chny/2024 & ITA No.3113/CHNY/2024 िनधाŊरण वषŊ/Assessment Years: 2011-12, 2012-13, 2013-14 & 2014-15 M/s. E.I.D. Parry India Ltd., No. 234, Dare House, NSC Bose Road, Parrys Corner, Chennai 600 001. [PAN: AAACE-0702-C] Vs. The Deputy Commissioner of Income Tax, Large Taxpayer Unit -1, Chennai. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) I.T.A. No. 3251/Chny/2024 िनधाŊरण वषŊ/Assessment Year: 2012-13 The Assistant Commissioner of Income Tax, Large Taxpayer Unit -1, Chennai. Vs. M/s. E.I.D. Parry India Ltd., No. 234, Dare House, NSC Bose Road, Parrys Corner, Chennai 600 001. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri R. Vijayaraghavan, Advocate ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Shri A. Sasikumar, CIT सुनवाई कᳱ तारीख/Date of Hearing : 20.03.2025 घोषणा कᳱ तारीख/Date of Pronouncement : 21.04.2025 आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: These four appeals filed at the instance of the assessee are directed against four separate orders of the Commissioner of Income Tax (Appeals) -16, Chennai passed under section 250 of the Income Tax Act, 1961 [hereinafter called ‘the Act’] (All the orders are dated 10.10.2024). The - 2 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 relevant assessment years are 2011-12, 2012-13, 2013-14 and 2014-15. The Revenue has also preferred cross appeal for the assessment year 2012-13 (ITA No. 3251/Chny/2024). 2. Common issues are raised in these appeals, hence, they were heard together and are being disposed off by this consolidated order. By the consent of both the parties, the appeal in IT(TP)A. No. 105/Chny/2024 for assessment year 2011-12 is taken as lead case for adjudication. 3. The first common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13 and 2013-14 is with regard to the confirmation of computation of Arm’s Length Price at 1.65% on the value of Letter of Comfort (LOC)/Guarantee offered by the assessee on behalf of its associated enterprise. 4. Brief facts of the case are as follows: 5. The assessee filed its return of income for the assessment year 2011-12 on 04.11.2011 admitting a loss of ₹.47,17,77,686/- and the same was processed under section 143(1) of the Act dated 16.08.2012. Subsequently, the case of the assessee was selected for scrutiny under CASS and notice under section 143(2) of the Act dated 02.08.2012 was duly served on the assessee. As per Form 3CEB submitted by the assessee, the assessee company has International Transaction with - 3 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 associated enterprises for ₹.26,26,07,912/-Therefore, the Assessing Officer referred the case to Transfer Pricing Officer under section 92CA of the Act for determination of Arm's length price of the international transactions. 6. On analysis of the financial statement and Form 3CEB of the assessee for the FY 2010-11, the TPO has ascertained that the assessee has provided LOC/guarantee to the tune of ₹.4.46 crores on behalf of its AE M/s. Parry America Inc. Accordingly, the assessee was required to explain as to why the mark-up of 2.39% should not be levied on the LOC/guarantee as ALP of the commission on LOC/Guarantee. After considering the submissions of the assessee, the TPO made various observations at para 6 of his order dated 30.12.2014. The same is reproduced as under: (i) It is an undisputed fact that the assessee company has provided the LOC/guarantee to its AE. (ii) The provisions of the sec.92B of the Income Tax Act 1961 clearly states that any capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business should be considered as an International transaction and ALP has to be computed. (iii) The assessee had provided Letter of Comfort to the tune of Rs. 4.46 crore in favour of its AE. The Letter of Comfort is for a bridge loan obtained by the AE from State Bank of India. It is a normal practice, for bankers to ask for Comfort Letter from parent company as an additional safeguard for their loan assets so that the primary securities provided or the cash flows on the basis of which loan is granted is not subsequently diverted to other group companies. Such requirement is also prescribed under various regulatory laws governing banking. (iv) In the assessee case it is an admitted fact that the LOC has been issued on 28.03.2009 by State Bank of India, Chennai. Copy of the sanctioned letter is reproduced. - 4 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 v) From the sanction letter it can be observed that the assessee company is providing hypothecation of entire current assets and counter guarantee for USD 2 million with a clause of covering all charges/exchange risk for extending LOC. Further all fixed asset of the assessee is also collaterally secured in favour of the bank. In addition to this the assessee company is paying 1% per annum (exclusive of service tax) as charges to the bank which was not reimbursed by the AE. Hence the character of the LOC is similar to the guarantee. vi) No doubt, provision of Loc/guarantee is one of the financial services rendered by the tax payer for which it has to be remunerated appropriately. Since the concerned parties, are associated enterprises, the said transaction is largely influenced by the related parties. To an independent enterprise the assessee would not have given such a huge Loc/guarantee without any fees or charges. This is one of the important factors in deciding the commission rates. The AE by virtue of the guarantee given, had utilized the funds for their business and is immensely benefitted by it. Any taxable income would accrue to the associate entity and not for the Indian entity. To that extent, shifting of tax base from the country is bound to happen in such transaction. Hence the assessee company should have been remunerated appropriately. For the said reasons the argument of the assessee that the corporate guarantee was extended to preserve the tax base of India cannot be accepted. vii) Moreover, in extending the Loc/guarantee, the risks undertaken by the Indian company is vast. The entire credit risks are borne by the Indian company & in the given scenario, the Indian company has to be reimbursed at maximum percentage of fees. The banks are also charging commission for the guarantee extended. But, Banks generally try to mitigate the risk. The Banks may insist on FDs/cash deposits/guarantee deposits/asset mortgage etc., to extend a guarantee on behalf of their clients. They never will do it free of cost for such huge amounts. The assessee company had simply stated that the relation between the AEs is like a parent and offspring and there are no risks associated with the guarantee given. But these are hypothetical propositions and ground reality is different. Even though the concerned parties are related parties, it has to be seen as separate legal entities which are operating in different tax jurisdictions. The procedure for liquidating a guarantee is different in different countries. The assessee company had given guarantee in different country where the arbitration and other legal procedures are entirely different. Further, the assessee company is a resident Indian company which is also subjected to the RBI regulations and FEMA guidelines. If any such situation arises that the bank guarantee has to be liquidated, it will happen only when the receiver of the guarantee is financially weak. In that case, it is a concern as to how the group company (subsidiary) will reimburse the sum to its parent company which has given guarantee. Absolutely, the person who had given guarantee bears maximum risk and it has to be rewarded for the huge risk taken by them. (viii) With due respect, while considering the decision of Hon'ble ITAT's in the case of Bharti Airtel and Redington (India) Limited, the facts of the assessee case is entirely different from the facts of the above said cases. In the assessee case the charge of 1% along with service tax has been beared by the assessee itself and it - 5 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 was routed through Profit & Loss account which affect the income/expenditure of the assessee. This fact was upheld by the Hon'ble ITAT in the case of M/s. Everest Kanto Cylinders Ltd, where it was decided that guarantee is an international transaction. (ix) It is similar to loan transaction, and the liability always lies with the assessee till the Loc/guarantee is closed. Certainly, it cannot be viewed as single isolated transaction with respect a particular year. It is a continuous process and has a long term effect on the Balance sheet of the company. It is always a contingent liability for the assessee company till the Loc/guarantee is closed. Taking a cue from the assessee's TP study an attempt is made to find out the guarantee commission rates charged by Bank which issued Loc/guarantee. The State Bank of India, Chennai charged 1% along with service tax against the assessee for issue of LOC. The same along with 0.5% of Risk may be considered as ALP and CUP is considered as Most Appropriate Method. 7. Based on the above facts and the rates levied by the bank, the TPO considered the same as ALP which is 1.65% (1%+ 0.15% as service charge + 0.50% as risk) and considering the same as CUP and computed the ALP of the corporate guarantee provided by the assessee to its AE Accordingly, the TPO calculated the ALP on the international transaction and proposed the adjustment amounting to ₹.7,35,900/- vide his order dated 30.12.2014. Since the assessee did not file either acceptance of the variations or objections, if any, with such variations mentioned in the draft assessment order, as required under section 144C(2) of the Act, the Assessing Officer completed the assessment under section 144C r.w.s. 92CA of the Act by making disallowance of ₹.7,35,900/-. 8. Aggrieved by the assessment order, the assessee carried the matter in appeal before the CIT(A). By considering the submissions of the assessee, the CIT(A) has observed that the LOCs are nothing but - 6 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 corporate guarantees and the TPO/AO has rightly adopted the ALP of 1.65% and dismissed the ground raised by the assessee. 9. Being aggrieved, the assessee raised the issue before the Tribunal. Before us, by relying upon the decision of the Coordinate Benches of the Tribunal in the case of M/s. Sundaram Fasteners Ltd. in IT(TP)A. Nos. 32 & 33/Chny/2021 vide order dated 08.11.2024, the ld. Counsel for the assessee has submitted that the Tribunal has been consistently holding that TP adjustment in respect of guarantee given to AE shall be at 0.5% and prayed to restrict the disallowance to 0.5%. 10. Per contra, the ld. DR supported the order passed by the CIT(A). 11. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The assessee company has provided letter of comfort (LOC) / Guarantee on behalf of its associated enterprise M/s. Parry America inc. for a sum of ₹. 4.46 crores. During the transfer pricing proceedings, the assessee has submitted that Letter of Comfort is a facility to avail credit by Parry America Inc. which is a subsidiary of the assessee company. Therefore, the assessee contented before the TPO that, the above facility is not a guarantee and the adjustment towards guarantee commission would not arise with reference to Section 92B(1) of the Act. However, the TPO observed that, “since the transaction is similar to loan transaction, the liability always lies with the - 7 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 assessee till the LOC/guarantee is closed. Based on the nature of the transaction it cannot be viewed as a single isolated transaction with respect to the particular year but is a continuous process that has long term effect on the balance sheet of the company. It is always a contingent liability for the assessee company till the LOC / Guarantee is closed”. After making comparative study, the TPO observed that the State Bank of India, Chennai charges 1% along with Service Tax for issue of LOC. Therefore, the TPO applied the comparable uncontrolled price method as the most appropriate method and applied the same along with 0.5% of risk to determine the Arm's Length Price of this transaction, which is 1.65%. As per the above recommendation proposing for an adjustment of ₹.7,35,900/- to be made to the income of the assessee and in conformity with the order passed by the TPO, in the assessment order under section 144C(3) r.w.s. 92CA of the Act dated 29.05.2015, the Assessing Officer disallowed a sum of ₹. 7,35,900/- as TP adjustment. On appeal, the CIT(A) confirmed the above TP adjustment. The assessee contended that Tribunal is consistently holding that TP adjustment in respect of guarantee given to AE shall be at 0.5% and prayed to restrict the disallowance to 0.5% by relying upon the decision of the Tribunal in the case of M/s. Sundaram Fasteners Ltd. (supra). Upon perusal of the case law, we find that by following the judgement of Hon’ble Jurisdictional High Court in the case of PCIT v. Redington (India) Ltd. reported in [2021] 430 ITR 298 (Mad) and the decision of the Hon’ble High - 8 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 Court of Bombay in the case of Everest Kanto Cylinder Ltd. v. ACIT reported in [2014] 52 taxmann.com 395 (Bom.) & 378 ITR 57, the Tribunal directed the Assessing Officer to restrict the TP adjustment @ 0.5% of the guarantee value. Accordingly, by following the above decision of the Tribunal, we restrict the corporate guarantee commission to 0.5% of guarantee value. Therefore, the ground raised by the assessee for all the assessment years under consideration is partly allowed. (Alternative ground namely 2.5 for AYs 2011-12 to 2013-14 are allowed). 12. The next common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 is with regard to the confirmation of disallowance made under section 14A r.w. Rule 8D of Income Tax Rules, 1962. 13. The Assessing Officer, after perusal of the financial, noted that the assessee has made investments in equity shares of subsidiary companies, mutual funds and other companies for a total outstanding sum of ₹.434,14,00,000/- as on 31.03.2011 and ₹.682,82,00,000/- as on 31.03.2010. It was further noted by the Assessing Officer that the assessee had earned exempted dividend income of ₹.114,31,60,448/-, but, in its computation, has disallowed only ₹.16,16,641/- under section 14A of the Act. During scrutiny proceedings, the Assessing Officer show-caused the assessee as to why the disallowance under section 14A of the Act should - 9 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 not be computed in accordance with Rule 8D. The Assessing Officer considered the submissions of the assessee and reproduced the same in para 3 of the assessment order and noted that as per the financials, the assessee has incurred interest expenditure for a sum of ₹. 42,43,00,000/-, which includes interest towards debentures, other fixed loans and others. Having agreed that the assessee was having substantial interest free own funds in the form of capital/reserves and surpluses, etc, the Assessing Officer was of the opinion that since no separate books are maintained and when the interest free own funds and the interest bearing borrowed funds are put into a common kitty, it cannot be held that the investments in shares, etc. are met out from interest free own funds. Therefore, the investments made has to be ascertained from borrowed funds, if any, on proportionate basis and the interest expenses, which could not be directly linked to any activity, are to be treated as common interest expenses and required to be considered under Rule 8D(2)(ii) for the purpose of attributing the indirect interest burden on the investments made on proportionate basis. The Assessing Officer further noted that substantial personnel, administrative and other expenses are debited to the profit & loss account, it cannot be denied that a portion of expenses such as consultation charges, bank charges, printing and stationery, legal and professional charges, electricity, etc. would be relatable to the earning of income from investment and thereby not satisfied with the correctness of the assessee’s - 10 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 claim of expenses at ₹.16,16,641/- towards earning of exempted dividend income. Accordingly, the Assessing Officer invoked the provisions of Rule 8D and determined the expenditure component in relation to the exempted dividend income and made disallowance of ₹.13,87,85,866/- under section 14A of the Act r.w. Rule 8D after allowing voluntary disallowance under 14A of the Act made by the assessee. 14. The assessee carried the matter in appeal before the CIT(A) and contended that the assessee had its own surplus funds for making investments in shares, etc. and pleaded that the disallowance under section 14A of the Act r.w Rule 8D(2)(ii) of interest expenditure should be deleted by relying upon the judgement of the Hon’ble Supreme Court in the case of South Indian Bank Ltd. v. CIT (2021) 438 ITR 1(SC). The assessee also prayed to delete the addition made under section Rule 8D(2)(iii). After considering the submissions of the assessee, the CIT(A) partly allowed the grounds raised by the assessee. 15. On being aggrieved by the impugned order, the assessee is in appeal before the Tribunal. Though the ld. Counsel for the assessee fairly conceded the directions of the CIT(A) to delete the disallowance of interest expenditure of ₹.11,24,95,507/- after verification of the quantum of share capital, reserve and surplus for the relevant year and if the same exceeds the investments which has resulted in exempt income, by relying upon the - 11 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 decision Delhi Special Bench in the case of ACIT v. Vireet Investments Pvt. Ltd. reported in 165 ITD 27 (Del. SB), the ld. Counsel for the assessee prayed that the disallowance under Rule 8D(2)(iii) has to be restricted at 0.5% of investments, which has actually yielded exempt income during the year after reducing suo motu disallowance made by the assessee and not the average of investments as appearing in the balance sheet of the assessee. 16. The ld. DR, besides, relying upon the decision of the CIT(A), fairly conceded the decision of the Delhi Special Bench (supra) as relied upon by the ld. Counsel for the assessee. 17. We have heard both the parties and perused the material available on record. Against the disallowance made by the Assessing Officer under section 14A of the Act r.w. Rule 8D(2)(ii), after considering the submissions and by following the decision of the Hon’ble Supreme Court in the case of South Indian Bank Ltd. v. CIT (supra), wherein, it was held that there is no statutory requirement to maintain separate accounts for investments for the purposes of section 14A of the Act and that where the assessee has own funds much more than the investments, then it has to be presumed that investments have been made out of own funds only, the CIT(A) directed the Assessing Officer to verify the quantum of share capital, reserve and surplus for the relevant year and if the same exceeds the investments - 12 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 which has resulted in exempt income and delete the disallowance of interest expenditure of ₹.11,24,95,507/- and the same is justified. 18. That apart, the CIT(A) confirmed the disallowance made under Rule 8D(2)(iii) of ₹.2,78,87,000/- being 0.5% of the average of investments as appearing in the balance sheet of the assessee, the income from which does not form part of total income as the Assessing Officer recorded satisfaction as provided under section 14A(2) of the Act. We find force in the arguments of the ld. Counsel for the assessee that the disallowance under Rule 8D(2)(iii) has to be restricted at 0.5% of investments, which has actually yielded exempt income during the year after reducing suo motu disallowance made by the assessee and not the average of investments as appearing in the balance sheet of the assessee by relying upon the decision of the Delhi Special Bench of the Tribunal in the case ACIT v. Vireet Investments Pvt. Ltd. (supra). We have perused the case law, wherein, the Delhi Special Bench of the Tribunal has held that the disallowance has to be worked out on the basis of investment which yielded dividend income during the year and not by factoring in the total amount of investment. 19. Respectfully following the order of the Delhi Special Bench of the Tribunal in the case of ACIT v. Vireet Investments Pvt. Ltd. (supra), we direct the Assessing Officer to restrict the disallowance under Rule - 13 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 8D(2)(iii) at 0.5% of investments which has actually yielded exempted income during the years under consideration after reducing the suo motu disallowance made by the assessee. Thus, the ground raised by the assessee is partly allowed for all the assessment years under consideration. 20. The next common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 is with regard to the confirmation of 50% of club expenditure on the ground that there would be personal entertainment. 21. The assessee claimed expenditure of ₹.12,79,106/- towards subscription to clubs. Before the Assessing Officer, the AR of the assessee has submitted that the expenses are incurred to enable the employees of the company to interact with the customers and procure business. Since the use of club facility for personal entertainment cannot be ruled out, the Assessing Officer disallowed 50% of the expenditure and added to the income of the assessee. On appeal, the CIT(A), by following the decision of this Tribunal in assessee’s own case for earlier assessment years in ITA Nos. 2370/Chny/2014, 273/Chny/2015, 449/Chny/2012, 274/Chny/2015, 492/Chny/2012, 2470, 2471 & 2472/Chny/2014 dated 01.01.2020 [final order dated 11.11.2021], confirmed the 50% disallowance made by the Assessing Officer. Since the assessee could not controvert the above - 14 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 decision of the Tribunal, which was followed in the impugned order, we find no infirmity in the order passed by the CIT(A) and we uphold the same on this issue. Thus, the ground raised by the assessee is dismissed for all the assessment years under consideration. 22. The next common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 is with regard to the confirmation of disallowance of depreciation on bogus purchase. 23. As per information received from the O/o DDIT (Inv.), Pune, wherein, it was stated that during the search conducted under section 132 of the Act in the case of Praj Group on 03.04.2012 and the statement recorded from the Associate Vice-President reveals that the value of the contract undertaken by the Praj Industries Ltd. (PIL) from EID Parry India ltd. for setting up of two ethanol plants at Pudukottai and Sivagangai districts in Tamil Nadu was agreed to be inflated by 17.24 crores. Out of the inflated amount, ₹.15 crores were to be returned to EID Parry India Ltd. after retaining conversion charges of ₹.2.24 crores. It was also stated that till the date of search, PIL has paid ₹.7.86 crores to the assessee in cash. Accordingly, during the course of scrutiny proceedings, the assessee was directed to submit the details of projects under taken with PIL in respect of Sivagangai & Pudukottai projects. After analysing the details furnished by - 15 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 the assessee as well as from the details received the DDIT, Pune, the Assessing Officer noted that the claim made by the assessee as retention money payable of ₹.7.84 crores matches with the amount said to have been inflated and repaid in cash by PIL to the assessee, which was further confirmed by the statement recorded under section 131 of the Act from Shri Anirudha Phadke, AVP on 20.02.2015. Accordingly, the Assessing Officer show-caused the assessee vide his letter dated 19.03.2015 as to why the claim of depreciation on the distillation plant installed by PIL at Shivagangai should not be disallowed. Moreover, the assessee was show-caused as to why the amount of ₹.55,00,000/- should not be disallowed under section 69A of the Act which was repaid by PIL to the assessee and not accounted in the books for FY 2010-11. Vide letter dated 25.03.2015, the assessee furnished detailed explanation and the same is reproduced at page 22 to 24 of the assessment order. After considering the submissions of the assessee as well as sworn statement recorded from Shri Anirudha Phadke, AVP, loose sheets in page No. 140, 139 & 137, seized during the search conducted in the premises of the assessee, which are scanned and reproduced at page 29 to 31 of the assessment order, the Assessing Officer disallowed the claim of depreciation at ₹.1,04,34,735/-, besides disallowance of ₹.55,00,000/- under section 69A of the Act being paid by PIL to the assessee in AY 2011-12 and not accounted in its books or furnished any satisfactory explanation. - 16 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 24. The assessee carried the matter in appeal before the CIT(A) against the disallowance of depreciation of ₹.1,04,34,735/- and addition of unexplained money of ₹.55,00,000/-. After considering the submissions of the assessee, the CIT(A) confirmed the disallowance of claim of depreciation and the disallowance made under section 69A of the Act. 25. On being aggrieved, the assessee is in appeal before the Tribunal. 26. The ld. Counsel for the assessee vehemently argued that the Department has no evidence that the assessee had inflated the cost of the project and moreover, the Assessing Officer has no prima facie evidence that the assessee had received any amount from Praj Industries Ltd. even after verifications of books of accounts of the assessee. There was no proof as to which employee of the assessee was paid and how it was paid. Just because in some piece of papers there were calculations, which are more or less coinciding, cannot be held that the assessee has received back money in cash from PIL in the absence of any statement recorded under section 132 of the Act from the assessee over the seized materials, which were used by the Assessing Officer. The ld. Counsel for the assessee further argued that during the course of setting up of distillery plant at factory of the assessee, the assessee has considered the proposals from other vendors and finalized after analysis and the amounts were paid as per the invoices raised by PIL for the work done by them for - 17 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 establishing distillery plant. The ld. Counsel has further submitted that the assessee filed appeals before the CIT(A) against the adjustment for the assessment years 2008-09 to 2010-11 in 2015, which are still pending for adjudication. 27. Per contra, the ld. DR strongly supported the orders of authorities below. The ld. DR submitted that the retention money payable of ₹.7.84 crores matches approximately with the amount said to have been inflated and repaid in cash by PIL to the assessee and in fact, the PIL admitted to providing accommodation entries in its application before the Income Tax Settlement Commission [ITSC]. In response to the settlement application of PIL pertaining to the AY 2007-08 to 2012-13, the Hon’ble ITSC vide order dated 20.03.2013 observed that against the cheque payments made to the parties for supplying bills for the bogus purchases, equivalent amount of cash after deduction of VAT and commission was received back in cash by the applicant and the amount so received was ₹.97,90,93,750/- and utilized for making payments to various management of personnel, executive and staff of customers for procurement of the business, approval for installation, supplies, etc. Therefore, the Assessing Officer has rightly held that the assessee had inflated the purchases in respect of Shivagangai plant amounting to ₹.9 crores thereby the excess depreciation of ₹.1,04,34,735/- in respect of the inflated amount was disallowed and moreover the receipt of ₹.55 lakhs on account of accommodation entries was rightly treated as - 18 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 unexplained money under section 69A of the Act and prayed that the ground raised by the assessee may be dismissed. 28. We have heard both the sides, perused the materials available on record. It is an admitted fact that the assessee has entered into an agreement with Praj Industries Ltd. for setting up of distillery plant at Sivagangai and Pudukkottai after following due procedures, thereby, both the assessee and Praj Industries Ltd. have close business nexus. The statements recorded from Shri Anirudha Phadke, AVP of PIL are duly reproduced in the assessment order and in the impugned order. On perusal of the assessment order, we note that the impounded material during the course of search in the case of assessee under section 132 of the Act were brought on record as part of the assessment order at pages 29 to 31. We note that against the seized materials, no statement under section 131 of the Act was recorded by the Department. The main contention of the assessee is that the information obtained from search proceedings in another case cannot be used for its assessment. However, we note that in the assessment order for AY 2011-12 (at page 19), it is mentioned that ₹.7,85,50,000/- was paid by cash to assessee from AY 2008-09. It has been brought to our notice that the assessee has filed appeals before the CIT(A) for AY 2008-09 to 2010-11 and the same is pending adjudication. In order to arrive at a conclusion in this case, it would be appropriate to have the decision of the CIT(A) on this issue in the appeals preferred by the - 19 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 assessee for the assessment years 2008-09 to 2010-11 and since the adjudication is still pending before the CIT(A), we deem it proper to remit the matter back to the file of the CIT(A) to first conclude the appeals of the assessee for the AY 2008-09 to 2010-11 and thereafter decide the appeals for the assessment years under consideration with regard to the claim of depreciation on bogus purchases and addition under section 69A of the Act for AY 2011-12. Thus, the grounds raised by the assessee are allowed for statistical purposes. 29. The next common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 is with regard to the confirmation of disallowance made under section 40(a)(i) of the Act. 30. During the course of scrutiny proceedings, the assessee was directed to submit the details of expenditures incurred in foreign currency and TDS deducted thereon. Accordingly, the assessee furnished the details of expenditure incurred towards professional charges – legal & consultancy of ₹. 5,90,886/-, sales promotion at ₹.13,11,110/-; US patent Mc Tavish – ₹.89,648/-, Valensa International – ₹.6,77,475, Market research – ₹.25,97,654/- & sales commission paid to Valensa International at Rs.35,10,594/- and conclusively submitted that in order to procure orders and customers base at abroad, market services rendered outside India, the - 20 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 assessee incurred these expenses for professional and managerial services rendered by the non-resident agents against which TDS was not deducted. After considering the submissions by reproducing the same at pages 14 & 15 in the assessment order, the Assessing Officer disallowed the expenses of ₹.87,77,367/- under section 40(a)(i) of the Act since the assessee could not deduct TDS. 31. On appeal, the CIT(A) noted that out of the total disallowance of ₹.87,77,367/-, the assessee incurred an amount of ₹.55,97,827/- towards sales promotion and sales commission outside India, a sum of ₹.5,90,886/- was paid towards professional charges (legal and consultancy) and an amount of ₹.25,97,654/- was paid towards market research. The CIT(A) followed the decision of the Hon’ble High Court of Madras in the case of CIT v. Faizan Shoes [2014] 48 taxmann.com 48 (Mad). The CIT(A) held that the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of Fees for Technical Services and cannot be taxed in India in the absence of permanent establishment. Accordingly, the CIT(A) directed the Assessing Officer to delete the addition of ₹.55,97,827/- made under section 40(a)(i) of the Act. Regarding the payment of ₹.25,97,654/- towards market survey and ₹.5,90,886/- towards legal & consultancy, the assessee could not produce applicable DTAAs before the CIT(A). Accordingly, the CIT(A) directed the Assessing Officer to examine the claim - 21 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 of the assessee in the context of the relevant DTAAs and the definition of FTS therein and to grant relief as per the provisions of section 90(2) of the Act. The ld. AR, during the course of hearing, submitted that the assessee does not have any grievance on this issue from the order of the CIT(A). Accordingly, the ground raised by the assessee stands dismissed. 32. The next common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 is with regard to the confirmation of disallowance made under section 35(2AB) of the Act. 33. The assessee has claimed weighted deduction @ 200% under section 35(2AB) of the Act for ₹.9,29,85,000/-, out of which the capital expenditure is ₹.17,84,000/- (being 100%) and the revenue expenditure is ₹.4,47,08,500 (being 100%). Since, vide letter dated 10.07.2012, the DSIR has certified the capital expenditure of ₹.17,84,000/- and revenue expenditure of ₹.3,67,27,000/- as eligible for weighted deduction under section 35(2AB) of the Act, the Assessing Officer disallowed the excess claim of weighted deduction on revenue expenditure for ₹.79,81,500/-. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). The CIT(A), by following various decisions, dismissed the ground raised by the assessee by observing as under: - 22 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 The appellant raised an additional ground that the amount of Rs,79,81,500/- disallowed on the basis of DSIR letter dated 10.07.2012 for non-eligibility u/s 35(2AB) has to be allowed u/s 37(1). The AO had restricted the eligible amount u/s 35(2AB) on the basis of DSIR letter which certified only the capital expenditure of Rs.17,84,000/- and revenue expenditure of Rs.3,67,27,000/- as eligible for the said deduction. The alternate plea of the appellant to allow the balance amount u/s 37(1) is rejected in view of the Hon’ble Supreme Court decision in the case of Drilcos India Co Ltd. [2012] taxmann.com 228 (SC) which held that once section 35AB comes into play, then section 37(1) has no application. The Supreme Court affirmed the decision of the High Court of Madras in [2004] 138 Taxman 177 (Madras) wherein the court observed that the assessee was clearly not entitled to have the amount paid by it to its collaborator for acquiring know-how as an item of revenue expenditure allowable as a deduction under section 37 and that payment was required to be considered only under section 35AB. In view of the above decision, I uphold the action of the AO in restricting the eligible deduction u/s 35(2AB) and reject the contention of the appellant that the balance amount should be allowed u/s 37(1). Accordingly, the additional ground of appeal is dismissed. 34. Before us, the ld. Counsel for the assessee has submitted that the assessee claimed weighted deduction in respect of expenditure (both Capital and Revenue) incurred in the R&D facility approved by DSIR. The DSIR had approved only a part of capital and revenue expenditures incurred in the R & D facility for the purpose of weighted deduction. He further submitted that the authorities below did not allow the expenditure, which were not considered by the DSIR for weighted deduction under section 35(1)(i) or 35(1)(iv) of the Act. The ld. Counsel for the assessee further contended that the assessee is entitled for weighted deduction in respect of the entire expenditure incurred in the approved R&D facility notwithstanding the fact that the DSIR had not approved the entire amount of expenditure for weighted deduction. By relying upon the decision of the Mumbai Benches of the Tribunal in the case of Crompton Greaves Limited (111 taxmann.com 338), wherein, the Tribunal has held that prior to - 23 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 amendment of Rule 6(7A)(b) from 01.07.2016, it was not required for the DSIR to quantify the expenditure entitled for weighted deduction, the ld. Counsel for the assessee has submitted that the addition made by the Assessing officer towards disallowance of the claim of weighted deduction should be deleted for all the assessment years under consideration and also relied on the decision of the Coordinate Benches of the Tribunal in the case of Ashok Leyland in ITA No.362/Chny/2024 dated 25.09.2024. 35. On the other hand, by filing written submissions, the ld. DR has argued that by conjointly reading the provisions of section 35(2AB)(1) and section 35(3) of the Act, it would be amply clear that even prior to the amendment made to Rule 6(7A) of the Income Tax Rules, the Prescribed Authority, i.e., the DSIR was empowered to limit the deduction under section 35 of the Act if the authority is of the opinion that the asset was not used solely for research purpose or the activity carried out does not result in enhancement of research facilities. He further submits that the case law relied on by the ld. Counsel for the assessee cannot be applied for the reason that the Tribunal, while passing order, has not discussed section 35(3) of the Act and prayed that the amount of disallowance made by the Assessing Officer based on the DSIR valuation should be upheld and dismiss the ground raised by the assessee. 36. We have heard the rival submissions and perused the material on record. Admittedly, the assessee has in-house Research and Development - 24 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 facilities which is approved by the Department of Scientific and Industrial Research (DSIR) and was entitled to deduction under section 35(2AB) of the I.T. Act. The Assessing Officer disallowed the deduction to the extent of ₹.79,81,500/- on the ground that DSIR has not approved the expenditure in Form 3CL. The CIT(A) confirmed the above disallowance. 37. As per section 35(2AB) of the Act, the DSIR is empowered to approve only R&D facility and not the expenditure. In other words, once the R & D facility is approved by the prescribed authority, i.e., DSIR by issuing Form No.3CM, the expenses incurred by the assessee have to be allowed under section 35(2AB) of the Act. For ready reference, section 35(2AB)(1) of the Act reads as follow:- “(2AB)(1) Where a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and two times of the expenditure so incurred.” 38. A plain reading of the above provision, it is clear that once R & D facility was approved by the DSIR and the expenses incurred by the assessee have to be allowed under section 35(2AB) of the Act. If the law wanted the expenditure to be approved by the prescribed authority, same would have been expressly provided. In other words, for the purpose of section 35(2AB) of the Act, it is provided that facility is to be approved and not the expenditure. Nowhere under the Act, it was stipulated that the - 25 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 deduction under section 35(2AB) of the Act was allowable year after year only after approval by DSIR in Form 3CL. The Rule 6(7A) of the I.T. Rules, 1962 was amended by the Finance Act, 2016 with effect from 01.07.2016, wherein, it provided that prescribed authority has to furnish electronically its report (i) in relation to approval of in-house R & D facility in Part A of Form No.3CL, and (ii) quantifying the expenditure incurred in in-house R & D facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No.3CL. In other words, the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 with effect from 01.07.2016 only. Prior to this amendment, no such power was with DSIR. 39. We have perused the case law relied on by the ld. Counsel for the assessee in the case of ACIT v. Crompton Greaves Ltd. (supra), wherein, by relying upon the order of Ahmedabad Benches of the Tribunal in the case of Sub Pharmaceutical Industries ltd. v. PCIT (2017) 162 ITD 484 and the order of the Pune Benches of the Tribunal in the case of Cummins India Ltd. v. DCIT [20180 96 Taxmann.com 576 (Pune – Tribunal), the Mumbai Benches of the Tribunal has observed and held as under: 12. It would also be apt to reproduce here-under the provisions substituted in clause (b) of sub rule (7A) of Rule 6, as brought in by the amendment effective from 01.07.2016 as above: \"The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of the in-house research and development facility in Part A of Room No. 3CL; - 26 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 (ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Income Tax Act, 1961 in Part B of Form No. 3CL.\" 13. Hitherto, the provision was as follows: \"The prescribed authority shall submit its report in relation to the approval of in-house facility and development facility in Form No. 3CL to the Director General (Income-tax Exemptions) within sixty days of its granting approval.\" The above also makes it amply clear that prior to the amendment, i.e., upto 30.06.2016, it was not required to quantify the expenditure and it was only w.e.f. 01.07.2016 that this mandate has been put in place. 14. The year under consideration is A.Y. 2009-10 and, for this year, the amendment was not applicable. Therefore, the assessee is right in contending that the non approval of the expenditure claimed by CSIR did not entitle the A.O. to make the disallowance and the ld. CIT(A) to confirm the same. 40. The Bangalore Benches of the Tribunal in the case of M/s. Mahindra Electric Mobility Ltd. v. ACIT in ITA No.641/Bang/2017 vide order dated 14.09.2018 had held that prior to 01.07.2016 Form No.3CL has no legal sanctity and it is only w.e.f. 01.07.2016 with the amendment to Rule 6(7A)(b) of the I.T. Rules that the quantification of the weighted deduction under section 35(2AB) of the Act has significance. The relevant finding of the Bangalore Bench of the Tribunal reads as follow:- “20. From the above discussion it is clear that prior to 1.7.2016 Form 3CL had no legal sanctity and it is only w.e.f 1.7.2016 with the amendment to Rule 6(7A)(b) of the Rules, that the quantification of the weighted deduction u/s.35(2AB) of the Act has significance. In the present case there is no Difficulty about the quantum of deduction u/s.35(2AB) of the Act, because the AO allowed 100% of the expenditure as deduction u/s.35(2AB)(1)(i) of the Act, as expenditure on scientific research. Deduction u/s.35(1)(i) and Sec.35(2AB) of the Act are similar except that the deduction u/s.35(2AB) is allowed as weighted deduction at 200% of the expenditure while deduction u/s.35(1)(i) is allowed only at 100%. The conditions for allowing deduction u/s.35(1)(i) of the Act and under Sec.35(2AB) of the Act are identical with the only difference being that the Assessee claiming deduction u/s.35(2AB) of the - 27 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 Act should be engaged in manufacture of certain articles or things. It is not in dispute that the Assessee is engaged in business to which Sec.35(2AB) of the Act applied. The other condition required to be fulfilled for claiming deduction u/s.35(2AB) of the Act is that the research and development facility should be approved by the prescribed authority. The prescribed authority is the Secretary, Department of Scientific Industrial Research, Govt. Of India (DSIR). It is not in dispute that the Assessee in the present case obtained approval in Form No.3CM as required by Rule 6 (5A) of the Rules. In these facts and circumstances and in the light of the judicial precedents on the issue, we are of the view that the deduction u/s.35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the Assessee and ought not to have been restricted to 100% of the expenditure incurred on scientific research. We hold and direct accordingly and allow the appeal of the Assessee.” 41. The Ahmedabad Bench of the Tribunal in the case of M/s. Sun Pharmaceutical Industries Ltd. v. PCIT (supra) had held that FormNo.3CL is merely a report in the form of an intimation regarding approval of in- house R & D facility to be sent from prescribed authority to the Department and once the facility is approved in Form No.3CL, the expenses incurred within the notified period have to be allowed under section 35(2AB) of the Act. The said order of the Tribunal was affirmed by the Hon’ble High Court of Gujarat in the case of CIT v. Sun Pharmaceutical Industries Ltd. reported in 250 Taxman 270 (Guj.). 42. The Pune Benches of the Tribunal in the case of Cummins India Limited v. DCIT in ITA No.309/Pun/2014 vide order dated 15.05.2018 had held that the action of the Assessing Officer curtailing the expenditure and consequent weighted deduction claim under 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in - 28 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 Form No.3CL is not tenable in law. The relevant finding of the Pune Benches of the Tribunal reads as follow:- “45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below.” 43. In view of the aforesaid reasoning and in the light of judicial pronouncements, cited supra, we hold that in the present case since the deduction is relating to the assessment years 2011-12 to 2014-15 [where the amended law is applicable w.e.f. 1stday of April, 2016), which is prior to the Income Tax (Tenth Amendment) Rules, 2016, with effect from 01.07.2016 of Rule 6(7A) of the I.T. Rules], deduction under section 35(2AB) of the Act has to be allowed on the basis of the expenditure as recorded by the assessee in the books of account. Admittedly, the Assessing Officer has not disputed the correctness of the claim of expenditure incurred on scientific research. The contention of the DR that the amendment to Rule 6(7A) is procedural cannot be accepted, since the - 29 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 amended rule stipulates a condition that apart from approval of in-house R & D facility of assessee, the expenditure also has to be quantified by the prescribed authority for weighted deduction under section 35(2AB) of the Act. Since, the amended Rule 6(7A) affects the substantive right of the assessee; it cannot be termed merely as procedural. Moreover, the co- ordinate Benches of Bangalore Tribunal in case of M/s. Mahindra Electric Mobility Ltd. v. ACIT (supra) have clearly held that prior to 01.07.2016 Form 3CL has no legal sanctity and it is only w.e.f. 01.07.2016 with the amendment to Rule 6(7A) of the I.T. Rules, the quantification of weighted deduction under section 35(2AB) of the Act has significance. Therefore, we are of the considered opinion that if the power of quantification of weighted deduction already exists with DSIR prior to 01.07.2016, then, there was no necessity to make amendment to Rule 6(7A) of the IT Rules. Thus, in view of the above facts and circumstances, we hold that the deduction as claimed by the assessee under section 35(2AB) of the Act is liable to be allowed instead of restricting it to the quantum of claim. 44. We have also considered the contention of the ld. DR. We note that the provisions of section 35 of the Act is a beneficial section and sub- section (1) of section 35(2AB) and sub-section (3) of section 35 of the Act are identical. Section 35(2AB)(1) of the Act suggests that the in-house R&D facility should be approved by DSIR and the said section does not provide that the approval from DSIR is required in respect of the expenditure - 30 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 eligible for weighted deduction. Further, section 35(2AB)(1) of the Act refers to “any” expenditure, therefore, the weighted deduction is to be allowed on expenditure “so incurred”. Thus, it is amply clear that sub- section (3) of section 35 of the Act has no application to be conjointly read for the purpose of allowance of weighted deduction prior to amendment to Rule 6 of Income Tax Rules for the reason that after amendment to Rule 6 of Income Tax Rules, under sub-rule (7A)(b)(ii) of IT Rules, the prescribed authority shall furnish electronically its report in Part B of Form No. 3CL towards quantification of expenditure and eligible for weighted deduction under section 35(2AB) of the Act. Prior to amendment to Rule 6 of the IT Rules, the provision of section 35(3) of the Act does not provide the scope for referring to DSIR for determining the amount of expenditure eligible for deduction. If at all the DSIR has the authority to decide the eligible expenditure prior to 01.07.2016, then, the intention to amend Rule 6 of IT Rules w.e.f. 01.07.2016 does not arise. Thus, the contention of the ld. DR stands rejected. 45. Under the above facts and circumstances, we set aside the order of the CIT(A) on this issue and direct the Assessing Officer to allow the deduction as claimed by the assessee under section 35(2AB) of the Act and accordingly, the grounds raised by the assessee is allowed for all the AYs under consideration. - 31 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 46. The next ground raised by the assessee for the assessment year 2011-12 is with regard to disallowance of provision on forward contract losses. The Assessing Officer noted that the assessee has claimed forward contract loss of ₹.2,28,19,794/-. The Assessing Officer show-caused the assessee why the same should not be disallowed, since, according to him forward contract is a notional loss. After considering the submissions of the assessee against the show-cause notice, the Assessing Officer has observed that entering into forward contracts/hedging contracts are not a regular business transaction. These contracts are primarily to protect the assessee from the unforeseen exchange fluctuations. They are not on account of foreign exchange fluctuation on receivable or payable which can be a regular business transaction. These liabilities are on account of hedging/forward contract which are totally independent from the assessee’s regular business. The Assessing Officer has further observed that in order to reduce the risk of exposing to the fluctuations in the foreign currency exchange rates, the assessee company entered into hedging contracts. These contacts are entered into keeping in mind the possible future fluctuations in view. Therefore, the hedging/forwarding contracts though for the purpose of protecting the assessee from exchange fluctuation risk, are essentially speculative in nature. Accordingly, the Assessing Officer disallowed the expenditure of loss on account of forward contracts entered - 32 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 into by the assessee to protect the forex fluctuation claimed under section 37 of the Act. 47. On appeal, after considering the contentions of the assessee, the CIT(A) directed the Assessing Officer to verify the purpose for which borrowings were made in foreign currency against which the assessee has claimed provision on forward contract loss, if on the basis of verification, it is established that the borrowings were on revenue account, then the losses are to be allowed. For ready reference, the relevant observations of the CIT(A) are reproduced as under: 5.10.2 It has been stated by the appellant that the forward contracts were entered into on account of foreign currency borrowings. The Hon'ble Supreme Court dismissed the SLP against the order in the case of CIT v C.J. Exporters [2020] 121 taxmann.com 8 (Bom.) which held that forward contracts for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuations would not be speculative activity, but business activity. It was held by the Hon'ble High Court of Madras in the case of Celebrity Fashion Ltd [2020] 119 taxmann.com 425 (Madras) that in case of assessee, not being a dealer in foreign exchange but an exporter of cogon, less incurred on account of cancellation of forward contracts would not be speculative losses falling within provisions of section 43(5) and assessee would be entitled to claim deduction in respect of loss suffered by it as a business loss. In the instant case, the appellant is not a dealer in foreign exchange but engaged in the business of manufacture and sale of sugar, power, distillery products etc. Hence the appellant is entitled to claim the loss on forward contract losses as an allowable expenditure provided the forward contracts were entered into on revenue account. If the foreign currency borrowings were for the purpose of acquisition of fixed assets or is capital in nature, then such losses are not admissible as held by the Jurisdictional High Court in the case of Continuum Wind Energe (India) (P) Ltd. [2020] 122 taxmann.com 102 (Madras). The Hon'ble High Court held that where assessee incurred foreign exchange fluctuation loss on foreign currency loan which was utilised by assessee for purchase of fixed assets, such loss was to be regarded as capital in nature not allowable under section 37(1). - 33 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 5.10.3 From the above decisions, it follows that the appellant is entitled to claim loss on forward contracts taken for the purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuations. However, it needs to be examined whether the foreign currency loans against which the forward contracts were entered into, were for regular business activities or for the purpose of acquisition of fixed assets. If for the purpose of acquisition of fixed assets, the same is not allowable. The AO is directed to verify the purpose for which borrowings were made in foreign currency against which the appellant has claimed provision on forward contract losses of Rs.2.28.19.794 If on the basis of verification, it is established that the borrowings were on revenue account, the losses are to be allowed. Accordingly ground no 8 is allowed for statistical purposes. 48. Before us, the ld. Counsel for the assessee has submitted that the forward contact losses represent the losses arising to the assessee in respect of restatement of contracts as on 31st March, 2011. He further submitted that these forward contracts were entered into to hedge in the course of normal business activities of import and export done to cover up losses on account of foreign exchange variations. By relying upon the order of Pune Benches of the Tribunal in the case of Cooper Corporation (P.) Ltd. v. DCIT (159 ITD 165), wherein, it has been held that restatement of borrowings, except the borrowings utilized for the purpose of importing machinery should be allowed as a revenue reduction and the same has been incorporated under section 43AA of the Act, the ld. Counsel for the assessee prayed that the Assessing Officer may be directed to decide the issue in accordance with law. 49. The ld. DR relied on the impugned order passed by the CIT(A) on this issue. - 34 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 50. We have heard the rival contentions and perused the materials available on record. In the assessment order, the Assessing Officer disallowed the expenditure of loss on account of forward contracts entered into by the assessee to protect the forex fluctuation claimed under section 37 of the Act for the reason that hedging/forward contracts are speculative in nature. The CIT(A) has observed that the assessee is entitled to claim loss on forward contracts taken for the purpose of hedging in the course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuations and it has to be examined as to whether the foreign currency loans against which the forward contracts were entered into, were for regular business activities or for the purpose of acquisition of fixed assets. Accordingly, the CIT(A) directed the Assessing Officer to verify the purpose for which borrowings were made in foreign currency against which the assessee has claimed provision on forward contract loss, if it is established that the borrowings were on revenue account, then the losses are to be allowed. 51. We have perused the case law relied on by the ld. Counsel for the assessee in the case of Cooper Corporation (P.) Ltd. v. DCIT (supra) and find that the purport of the order of the Pune Benches of the Tribunal in the above case is that in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, the claim of exchange fluctuation - 35 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 loss in revenue account by the assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification, which is in line with the observations of the CIT(A) in the present case. Thus, we find no reason to interfere with the impugned order passed by the CIT(A). Thus, the ground raised by the assessee for AY 2011-12 stands dismissed. I.T.A. No. 3251/Chny/2024 – AY 2012-13 [Revenue’s appeal] 52. The only effective ground raised by the Revenue is whether the CIT(A) is justified in directing the Assessing Officer to allow the claim of additional depreciation brought forward from the assessment year 2011-12 in the given facts and circumstances of the case. 53. The assessee claimed additional depreciation under section 32(1)(iia) of the Act amounting to ₹.2,58,45,663/- during the year at the rate of 10% (50% of 20%) in respect of second-half additions made to plant and machinery during the preceding assessment year 2011-12. However, by following the decision of the Tribunal in the case of Wheels India Ltd. for AY 2010-11 in ITA No. 383 & 396/Mds/2014 dated 26.09.2014, the Assessing Officer disallowed the claim of additional depreciation and brought to tax. On appeal, by following the decision of the Tribunal in assessee’s own case for earlier assessment years vide order dated 01.01.2020 (supra) and the decision of the Hon’ble High Court of Madras in - 36 - IT(TP)A Nos.105 to 107/Chny/2024 & ITA No. 3113 & 3251/Chny/24 the case of CIT v. Aztec Auto (P) Ltd. [2021] 277 Taxmann 273 (Madras), the CIT(A) directed the Assessing Officer to grant additional depreciation brought forward from AY 2011-12 and allowed the ground raised by the assessee. The ld. DR could not controvert the above judgements of the Hon’ble High Court of Madras as well as decision of the Tribunal in assessee’s own case (supra) having modified/rectified or reversed by any higher Courts. Just because the Department preferred further appeal against the order of the Tribunal, we cannot take different view. Thus, the ground raised by the Revenue is dismissed. 54. In the result, all the appeals filed by the assessee are partly allowed for statistical purposes and the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 21st April, 2025 at Chennai Sd/- (एस.आर .रघुनाथा) (S.R. RAGHUNATHA) लेखा सद᭭य/ACCOUNTANT MEMBER Sd/- (जॉजᭅ जॉजᭅ के) (GEORGE GEORGE K) उपा᭟यᭃ /VICE PRESIDENT चेɄई/Chennai, िदनांक/Date: 21.04.2025 Vm/- आदेशकीŮितिलिपअŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकरआयुƅ/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीयŮितिनिध/DR & 5. गाडŊफाईल/GF. "