Ita/44/2017 Of The Principal Commissioner Of Income Tax v. M/S. Apollo Tyres Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM WEDNESDAY,THE 22 DAY OF SEPTEMBER 2021/31ST BHADRA, 1943 ITA NO. 44 OF 2017 AGAINST THE JUDGMENT IN ITA 223/Coch/2015 OFI.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/Respondent: THE PRINCIPAL COMMISSIONER OF INCOME TAXKOCHI-I, KOCHI, INCOME TAX OFFICES, CENTRAL REVENUE BUILDING, I.S.PRESS ROAD, KOCHI - 682 018.BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAXCHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/Appellant: M/S. APOLLO TYRES LTD6TH FLOOR, CHERUPUSHPAM BUILDING, SHANMUGHAM ROAD, ERNAKULAM - 682 031. (PRESENT ADDRESS 3RDFLOOR, AREEKAL MANSION, NEAR MANORAMA JUNCTION,PANAMPILLY NAGAR, KOCHI - 682 036)BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.ISAAC THOMASSRI.P.G.CHANDAPILLAI ABRAHAMSHRI.VIPIN ANTO H.M.SHRI.ALEXANDER JOSEPH MARKOSSHRI.SHARAD JOSEPH KODANTHARA THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSIONON 22.09.2021, THE COURT ON THE SAME DAY DELIVERED THEFOLLOWING: ITA No.44/2017 ITA No.44/2017 J U D G M E N T S.V.Bhatti, J. The Principal Commissioner of Income Tax, Kochi-1/Revenue is the appellant. M/s.Apollo Tyres Ltd.,Kochi/Assessee is the respondent. The Revenue being aggrievedby the order in ITA No.223/Coch/2015 dated 10.01.2017 for theAssessment Year 2010-11 has filed the instant appeal. 2.On 01.10.2010 the assessee filed income tax returns for the Assessment Year 2010-11. On 23.10.2012 the assessment has been referred to the Transfer Pricing Officer-1, Kochi underSection 92CA of the Income Tax Act, 1961 (for short 'the Act').On 29.01.2014, the Joint Director of Income Tax, TransferPricing Officer-1, Kochi, made the order under Section 92CA(3) ITA No.44/2017 of the Act. The Assessing Officer through Annexure-B draftassessment order dated 28.03.2014 proposed to finalize theincome tax return of the assessee assessed total income asRs.481,78,02,530/-. The assessee raised objections to the draftassessment order dated 28.03.2014. The issues were referred toDispute Resolution Panel (DRP), Bangalore, for decision anddirection in terms of Section 144C of the Act. The DRP, throughAnnexure-C dated 26.12.2014, issued directions under Section144C(5) of the Act to the A.O. The Assessing Officer, throughAnnexure-D order dated 18.02.2015, finalized the assessment forthe Assessment Year 2010-11, determining the total income ofthe assessee as Rs.458,92,01,660/-. The assessee, aggrieved bythe order in Annexure-D dated 18.02.2015, filed ITANo.223/Coch/2015 before the Income Tax Appellate Tribunal(for short 'the Tribunal'), Cochin Bench, Cochin. The Tribunal,through the order impugned in the appeal, allowed in part the appeal of the assessee, either accepted the case of the assessee or desired that the matter needs re-examination by theAssessing Officer, accordingly remitted a few issues. 2.1 The Revenue, being aggrieved by the order of the Tribunal rendered under following heads filed the appeal: ITA No.44/2017 -5- 7Disallowance of claim of prepaid expenses as deduction 2.2We have heard learned Counsel Mr ChristopherAbraham and Senior Advocate Mr Joseph Markos for theparties. 3.Substantial Question Nos.1, 1.1, 1.2: “1 Whether the Hon'ble Tribunal, in the facts andcircumstances of the case as well as in law, is right to holdthat the expenditure on setting up of new unit at Chennaias revenue expenditure, thereby directing to delete thedisallowance of Rs.26,97,79,538/-, which was held to bepreoperative expenditure in the impugned assessmentorder? 2.1 The Revenue, being aggrieved by the order of the Tribunal rendered under following heads filed the appeal: ITA No.44/2017 -5- 7Disallowance of claim of prepaid expenses as deduction 2.2We have heard learned Counsel Mr ChristopherAbraham and Senior Advocate Mr Joseph Markos for theparties. 3.Substantial Question Nos.1, 1.1, 1.2: “1 Whether the Hon'ble Tribunal, in the facts andcircumstances of the case as well as in law, is right to holdthat the expenditure on setting up of new unit at Chennaias revenue expenditure, thereby directing to delete thedisallowance of Rs.26,97,79,538/-, which was held to bepreoperative expenditure in the impugned assessmentorder? 1.1 Whether the Hon'ble ITAT, in the facts andcircumstances of the case as well as in law, is right indirecting to delete the above addition purely on "175" thebasis of assessee's contention that impugned expenditurewere of routine administrative expenses not relating toacquisition and installation of any capital asset in relation to setting up of the new unit at Chennai, in the light ofHon'ble ITAT's decision in assessee's case for A.Y.2009-10,wherein similar matter was involved and the Hon'ble ITATremitted the issue back to the file of the Assessing Officerfor ascertaining the exact nature of the impugnedexpenditure and decision afresh? 1.2 Whether the Hon'ble ITAT, in the facts andcircumstances of the case as well as in law, is right inholding without appreciating the fact that the assesseecompany had claimed loan processing fee and bank chargesas forming part of expenditure incurred in connection withsetting up of new unit at Chennai before coming to theconclusion that the above expenditure was administrativenature as contended by the assessee? 3.1The assessee claims as revenue expenditure a sum of Rs.26,97,79,538/-. The assessee claims to have expended Rs.26,97,79,538/- as part of the expansion of its business activityin the process incurred as direct and indirect expenditure forsetting up the new manufacturing plant at Chennai. The natureof expenditure during the setup period comprises expenditure ITA No.44/2017 incurred on salaries, travelling and the commercial expendituremet by the staff/consultants involved and engaged by theassessee in the capacity expansion of assessee's manufacturingcapacity. The assessee claimed the said expenditure, as revenueexpenditure, as the assessee intended to horizontally expand itsmanufacturing capacity by setting up a new plant at Chennai,and the expenditure substantially satisfies the definition andmeaning of 'revenue expenditure'. It is contextual to advert atthis juncture that the Revenue does not dispute the genuinenessor veracity of the expenditure claim by the assessee. The claimfor deduction of preoperative expenditure incurred by theassessee is rejected on the ground that the assessee, since hadcapitalized the expenses in its books of accounts and treated theongoing establishment of a unit as work-in-progress, theexpenses are added to the cost of the plant and the machineryetc. of the new plant in terms of Section 43(1) of the Act. ITA No.44/2017 Thereafter available depreciation could be claimed by addingthe expenditure to the capital expenditure. In other words, theassessee, according to Revenue, is entitled to claim depreciation on the capitalized value of the new plant but cannot be allowedto book expenses towards preoperative expenditure incurred bythe assessee for establishing the plant. 3.2The Assessing Officer disallowed the claim ofRs.26,97,79,538/- towards preoperative expenditure. The Tribunal examined the rival contentions of the assessee and theRevenue; relied on the judgments reported in Commissioner ofIncome Tax v. Sakthi Sugars[1] and Commissioner of Income Tax v.Priya Village Roadshows Ltd[2] and allowed the claim of assessee asrevenue expenditure amounting to Rs.26,97,79,538/-. ITA No.44/2017 Thereafter available depreciation could be claimed by addingthe expenditure to the capital expenditure. In other words, theassessee, according to Revenue, is entitled to claim depreciation on the capitalized value of the new plant but cannot be allowedto book expenses towards preoperative expenditure incurred bythe assessee for establishing the plant. 3.2The Assessing Officer disallowed the claim ofRs.26,97,79,538/- towards preoperative expenditure. The Tribunal examined the rival contentions of the assessee and theRevenue; relied on the judgments reported in Commissioner ofIncome Tax v. Sakthi Sugars[1] and Commissioner of Income Tax v.Priya Village Roadshows Ltd[2] and allowed the claim of assessee asrevenue expenditure amounting to Rs.26,97,79,538/-. 4.Mr Christopher Abraham contends that theexpenditure does not strictly satisfy the characteristic of 1(2011) 339 ITR 400 (Mad) ITA No.44/2017 revenue expenditure even by a liberal approach or going by theaccountancy standards followed by the assessee. The assesseehas capitalized the expenditure, and the permissible deductionin such circumstances is only by way of depreciation underSection 40(3)(i) of the Act. The abstract application of thereported judgments in Sakthi Sugars and Priya Village RoadshowsLtd cases resulted in an unacceptable finding, particularly, inthe available circumstances of the case. He prays for settingaside the allowance granted by the Tribunal. 5.Per contra, learned Senior Advocate Mr Joseph Markoscontends that the assessee in its armchair has discretion andcan decide on the business dynamics including expansion ofbusiness by setting up a new unit to develop capacity building.The effort of the assessee in establishing a new unit at Chennaiis a horizontal expansion of the capacity building at a newlocation. Capitalization is required for the purpose of accounting standards and when it comes to the Income Tax Act, the expenditure is incurred as simple and revenue expenditure,to bring into existence a new plant. The Tribunal did not missany of the important aspects in appreciating the claim of theassessee made as revenue expenditure. He relies on thejudgments reported in Sakthi Sugars (supra), Jay EngineeringWorks Ltd, v. Commissioner of Income Tax[3], Commissioner of IncomeTax v. Havells India Ltd.[4], Commissioner of Income Tax v. RelaxoFootwears Ltd[5]., and Deputy Commissioner of Income-Tax v. CoreHealth Care Ltd.[6] for demonstating the ratio of counts in treatingthe expenditure as revenue expenditure, prays for answeringthe questions in favour of the assessee and against the Revenue. 6.The substantial questions deal with the amountexpended by the assessee towards preoperative expenses forestablishing a plant, whether would constitute capital 3(2009) 311 ITR 405 (Delhi) 4(2013) 352 ITR 376 (Delhi) 5(2007) 293 ITR 231 (Delhi) 6(2008) 298 ITR 194 SC ITA No.44/2017 expenditure or revenue expenditure in the facts andcircumstances of the case. Section 37 of the Act enablesdeduction of any expenditure which is laid out or expendedwholly and exclusively for the purpose of the business orprofession, as the case may be, and which is not in the nature ofcapital expenditure. In the infinite variety of situations anddiversities in which the concept of what constitutes capitalexpenditure or revenue expenditure, it is not possible toformulate a general rule having universal application.However, a few broad and general tests have been suggestedfrom time to time to ascertain on which side of the line theoutlay in any particular case might reasonably falls. These testsare generally efficacious and serve as useful servants; but asmasters, they tend to be over-exacting. The question in eachcase would necessarily be whether the tests relevant andsignificant in one set of circumstances are relevant and -12- -12- significant in the case on hand also, [see Alembic Chemical WorksCo. Ltd. v. Commissioner of Income Tax, Gujarat[7]]. We would notrepeat the decisions considered by the Tribunal while recordinga conclusion on the question under consideration. For brevityand also to complete the narrative on how this aspect of thematter is examined by the Courts, we refer to the followingdecisions: Core Health Care Ltd: Section 36(1)(iii) of the Income-tax Act, 1961, has to be readon its own terms: it is a code by itself. It makes nodistinction between money borrowed to acquire a capitalasset or a revenue asset. All that the section requires isthat the assessee must borrow capital and the purpose ofthe borrowing must be for business which is carried on bythe assessee in the year of account. Unlike Section 37which expressly excludes an expense of a capital nature,section 36(1)(iii) emphasises the user of the capital and notthe user of the asset which comes into existence as a resultof the borrowed capital. The Legislature has,therefore,made no distinction in section 36(1)(iii) between "capitalborrowed for a revenue purpose" and "capital borrowed fora capital purpose". An assessee is entitled to claim interestpaid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed."Actual cost of an asset has no relevancy in relation toSection 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1,2004, will operateprospectively. Held accordingly, that the assessee was entitled to deduction under section 36(1)(iii) prior to its amendmentby the Finance Act,2003, in relation to money borrowed forpurchase of machinery even though the assessee had notused the machinery in the year of borrowing. Decision of the Gujarat High Court in Deputy CIT v Core Health Care Ltd. [2001]251 ITR 61 affirmed on thispoint. Held also, remanding the matters to the High Court, thatthe questions: (a) whether advertisement expenses incurred by theassessee to create a brand image with enduring benefit areallowable as revenue expenditure (b) whether the Tribunalhad erred in granting deduction under Section 35Dregarding short-term loan, in view of the Explanation toSection 35D(3) which refers only to long-term borrowings,and (c) whether the Tribunal had erred in directingdeduction under Section 80HH and 80-I on themiscellaneous income of Rs.26,64,113 being income on saleof empty containers, were substantial questions of law andthe High Court erred in dismissing the application of theDepartment on those questions and the High Court had todecide them." -14- Relaxo Footwears Ltd: This order was challenged by the Revenue as well as theassessee. The Tribunal allowed the appeal filed by theassessee and dismissed the appeal of the Revenue. On furtherappeal by the Revenue contending that (i) the expensesincurred in a new unit earlier to the commencement of themanufacturing process had to be capitalised and the newbusiness of the assessee could not be said to be an extensionof the existing business, (ii) the expenditure incurred inconnection with the purchase and installation of plant andmachinery was capital in nature and thus disallowable, and(iii) the pre-operative expenses could not be written off atone go but had to be capitalised and admissible depreciationallowed thereon: Held, dismissing the appeal, that the new unit was a part ofthe existing business and there was no dispute that therewas unity of control and inter lacing of the units. Thus theexpenses incurred by the assessee for the setting up of thenew unit which was a part of the existing business were.” therefore to be allowed as a revenue expenditure (emphasis supplied) 6.1The Revenue does not contend on the tenability or ITA No.44/2017 Held, dismissing the appeal, that the new unit was a part ofthe existing business and there was no dispute that therewas unity of control and inter lacing of the units. Thus theexpenses incurred by the assessee for the setting up of thenew unit which was a part of the existing business were.” therefore to be allowed as a revenue expenditure (emphasis supplied) 6.1The Revenue does not contend on the tenability or ITA No.44/2017 genuineness of the expenditure incurred by the assessee aspreoperative expenditure for establishing a radial car tyremanufacturing unit in Chennai. The objection raised by theAssessing Officer is that the capitalization of expenditure sincehas been adopted by the assessee in its books of account, theoutflow cannot be booked and claimed as expenditure underSection 37(1) of the Act. Now, therefore, the question raised iswhether the expenditure incurred by the assessee forestablishing a unit in Chennai is to be treated as revenueexpenditure or should be capitalized in the asset of unit atChennai. As noted by the Supreme Court in Alembic ChemicalWorks Co. Ltd. case, though the tests are available fordetermining what constitutes revenue expenditure and capitalexpenditure, the final analysis depends on case to case basis.The reported cases in Sakthi Sugars and Priya Village RoadshowsLtd cases, the following tests or requirements for identifying the -16- expenditure, whether as capital or revenue, are juxtaposed forour consideration as well: “"34. From the above decisions the test for identifying anexpenditure as to whether it is a revenue expenditure or capitalexpenditure can be stated as under (1) If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, itwould be a capital expenditure. (2) If on the other hand, it is not made for the purpose ofbringing into existence any such asset or advantage but forrunning the business or working it with a view to producethe profits, it is a revenue expenditure. (3) For instance if the interest paid was in respect of the asset, which was acquired on an outright basis than it wasintimately linked with the value of the asset. Thatdetermines the character of the expenditure and it wascapital in nature. onKeeping the about tests in mind, when we examine the case hand, the various kinds of expenditures relating to the sum of6,84,78,570/-, the details of which have been mentioned inparagraphs 19 and 20, disclose that all those expenditures wereincurred in the relevant years for the purpose of manufactureof sugar in the respective factories with a view to earn profits and therefore they are nothing but revenue expenditure only. In other words, all expenses which were incurred by way ofsalaries, wages, bonus, provident fund contribution, workmenwelfare expenses, power, fuel and water, manufacturingexpenses, rent for office building etc., were all expenses whichwere incurred for the purpose of running of the business and itcannot be held to be by way of investment. In fact there was nodispute that whatever investments made for Baramba unit andDhenkanal unit were capitalised and were never claimed byway of revenue expenditure." 11.The Hon'ble Delhi High Court in the case of CIT Vs. PriyaVillage shows, 332 ITR 594 observed as under: "10. A harmonious reading of the aforesaid two judgmentsof this Court, namely, Triveni Engg. Works Ltd. (supra) onthe one hand and Modi Industries (supra) on the other,would demonstrate that one has to keep in mind theessential purpose for which such an expenditure isincurred. If the expenditure is incurred for starting newbusiness which was not carried out by the assessee earlier,then such expenditure is held to be of capital nature. Inthat event it would be irrelevant as to whether projectreally materialised or not. However, if the expenditureincurred is in respect of the same business 'which isalready carried on by the assessee, even if it is for the 11.The Hon'ble Delhi High Court in the case of CIT Vs. PriyaVillage shows, 332 ITR 594 observed as under: "10. A harmonious reading of the aforesaid two judgmentsof this Court, namely, Triveni Engg. Works Ltd. (supra) onthe one hand and Modi Industries (supra) on the other,would demonstrate that one has to keep in mind theessential purpose for which such an expenditure isincurred. If the expenditure is incurred for starting newbusiness which was not carried out by the assessee earlier,then such expenditure is held to be of capital nature. Inthat event it would be irrelevant as to whether projectreally materialised or not. However, if the expenditureincurred is in respect of the same business 'which isalready carried on by the assessee, even if it is for the expansion of the business, namely, to start new unit whichis same as earlier business and there is unity of controland a common fund, then such an expense is to be treatedasbusinessexpenditure.” 6.2The case on hand satisfies all the independent and interrelated tests broadly laid down by the Sakthi Sugars andPriya Village Roadshows Ltd cases. The proposed new plant isevidencing unity of control and interlacing of the units of theassessee for capacity building of production of Radial tyres. The horizontal expansion is to sustain/earn more profitability fromthe business, the assessee is already doing. The assessee, inaccordance with the accounting standard practices hascapitalised the expenditure in its books of accounts, it is notclaiming depreciation on the value of the capitalised asset. 6.3Mr Joseph Markos has argued that the depreciation claimed is not upon including the preoperative expenses to thenew plant at Chennai. The expenses are in effect outflow for ITA No.44/2017 increasing the business of the assessee and, therefore, rightlytreated and held as revenue expenditure by the Tribunal. Thequestion, again, is not whether the assessee should be calledupon to capitalise and claim depreciation; the question iswhether the claim of the assessee conforms the deductionpermissible under Section 37(1) of the Act. In the facts andcircumstances of this case, we are of the view that thepreoperative expenses amounting to Rs.26,97,79,538/- incurredby the assessee are revenue expenses, and are correctly so heldby the Tribunal. The above view is fortified by a catena ofdecisions in favour of the assessee. We do not, as a matter offact, see any reason distinguishable in the case on hand toaccept the contest of the Revenue. For the above reasons and discussion, substantial question Nos.1, 1.1 and 1.2 are answered in favour of the assessee andagainst the Revenue. ITA No.44/2017 -20- 7.Substantial Question No.2: “2.Whether the Hon'ble ITAT, in the facts andcircumstances of the case as well as in law, is justified indirecting to delete the addition of Rs.4,70,07,847/- being loanprocessing fee and bank charges claimed as revenueexpenditure relating to setting up of new unit at Chennai asexpansion of assessee's business as contended by the assesseewithout appreciating the nature of expenditure and ascertainas to whether the expenditure was incurred for acquisition andinstallation of new assets?” 7.1Substantial question No.1 relates to expenses incurred on salary, travelling and commercial expenditureincurred in connection with staff, consultants etc. involved inestablishing the new plant at Chennai. Substantial questionno.2 relates to the expenditure incurred by the assesseetowards loan processing fee, bank charges etc amounting toRs.4,70,07,847/- as revenue expenditure. 8.Mr Christopher Abraham argues that the nature and character of expenses, namely, loan processing fee and bank ITA No.44/2017 charges are akin to interest payable by the assessee on the loan 7.1Substantial question No.1 relates to expenses incurred on salary, travelling and commercial expenditureincurred in connection with staff, consultants etc. involved inestablishing the new plant at Chennai. Substantial questionno.2 relates to the expenditure incurred by the assesseetowards loan processing fee, bank charges etc amounting toRs.4,70,07,847/- as revenue expenditure. 8.Mr Christopher Abraham argues that the nature and character of expenses, namely, loan processing fee and bank ITA No.44/2017 charges are akin to interest payable by the assessee on the loan the assessee has borrowed, Section 36(1) proviso is kept in mindwhile entertaining the present claim of the assessee. Theexpenditure, if treated as akin to interest, there is bar underSection 36(1) proviso for allowing the expenditure and Section37 cannot be relied upon which deals with other expenses notcovered by any other provision. 8.1For the assessee, it is argued that the proviso reliedon by the Department is not applicable or attracted to the caseon hand. The processing fee and bank charges are expensesincurred for getting the loan, and interest is always paid on theloan availed/sanctioned by the bank, as the case may be. Thesimple expenditure incurred by way of outflow from the booksof account of the assessee cannot be again included in the loanborrowed by the assessee and give a complexion of interest onlyto attract the proviso of Section 36(1) of the Act. He places ITA No.44/2017 -22- strong reliance on the judgments of the Supreme Court inDeputy Commissioner of Income Tax v. Gujarat Alkalies and ChemicalsLtd[8] and order of the Tribunal in assessee’s own case reportedin Assistant Commissioner of Income Tax v. Apollo Tyres Ltd.[9] Theoperative portion of the judgment reads as follows:Gujarat Alkalies and Chemicals Ltd “Regarding question No. (1), we may state that the assessee hadborrowed Rs. 30 crores (approximately) from IDBI which inturn was refinanced by COFACE which foreign company hadcharged interest, commitment charges and insurance chargespayable by the assessee. The said "commitment charges" wasupfront payment. We have also examined the contract betweenIDBI and the assessee. In the case of Addl. CIT v. AkkamambaTextiles Ltd. [1997] 227 ITR 464, this court has held that commission paid by the assessee to the banker and the insurancecompany was admissible deduction under section 37 of theIncome-tax Act, 1961. To the same effect is the judgment of thiscourt in the case CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465.For the aforestated reasons, we answer question No. (1) infavour of the assessee and against the Department. We may 8(2008) 299 ITR 85 (SC) 9(2013) 33 taxmann.com 575 (Cochin-Trib.) clarify that both the above judgments allow deduction undersection 37 of the 1961 Act and not under section 36(1)(iii) of the1961 Act. In this case, the Tribunal has allowed the claim undersection 37 and not only section 36(1)(iii), hence there is noinfirmity therein. 8(2008) 299 ITR 85 (SC) 9(2013) 33 taxmann.com 575 (Cochin-Trib.) clarify that both the above judgments allow deduction undersection 37 of the 1961 Act and not under section 36(1)(iii) of the1961 Act. In this case, the Tribunal has allowed the claim undersection 37 and not only section 36(1)(iii), hence there is noinfirmity therein. As regards question No. (2) it may be stated that theassessee established a phosphoric acid project as an extensionto its present business activities and for that purpose obtaineda foreign currency loan from IDBI which in turn was refinancedby COFACE subject to the assessee paying finance charges toCOFACE which according to the assessee was similar topayment of interest. The Department disallowed the said itemon the ground that finance charges paid to COFACE on theforeign currency loan were in the nature of interest andcommitment charges and since the charges have been paid inrelation to the project of manufacturing phosphoric acid whichdid not commence production during the assessment yearunder consideration, the expenses incurred were capital innature. The Department also placed reliance in this connectionon Explanation 8 to section 43(1) of the Income-tax Act, 1961.On the facts and circumstances of this case, once theDepartment equated the charges payable to COFACE withinterest, our judgment in the case of Deputy CIT v. Core HealthCare Ltd. in Civil Appeals Nos. 3952-55 of 2002 comes in. Accordingly, the said question No. (2) is also answered in favourof the assessee and against the Department. Before concluding, we may also mention that in this casethe finance charges paid by the assessee to COFACE have alsobeen equated by the Department with commitment chargeswhich, as stated above, are held to be revenue expenditure anddeductible under section 37 of the Income-tax Act, 1961 [seeAkkamamba Textiles Ltd. (supra) and Sivakami Mills Ltd.(supra)]. Therefore, on either count the above question No. (2)is answered in favour of the assessee and against theDepartment.” The conclusion recorded by the Tribunal is in line with the principles laid down by various High Courts and this Court in I.T.R. No.68/2000. Hence, substantial question no.2 is answered in favour of the assessee and against the Revenue. Substantial Question No.3 3.Whether the Hon'ble ITAT, in the facts andcircumstances of the case, is legally right in deletingwaited deduction of Rs.94,98,220/- under S.35(2AB)claimed by the assessee in respect of expenditure claimedon R & D expenses met outside India? 3.1 Whether the Hon'ble ITAT, in the facts andcircumstances of the case as well in law, is correct inapplying the decision of Gujarat High Court in CIT vCadila Healthcare Ltd. Reported in 31 Taxmann.com 300to the facts of the assessee's case, which are entirelydistinguishable from the said decision? 3.2 Whether the Hon'ble ITAT, in the facts andcircumstances of the case, is correct to hold that being anincentive provision, section 35(2AB) should be liberallyinterpreted and deduction allowed in view of Hon'bleSupreme Court decision in Bajaj Tempo Ltd. Reported in62 Taxman 480 bereft of the prerequisite of a certificate ofDSIR? 10.The circumstances relating to substantial question No.3 are that the assessee under Section 35(2AB) claimed weighteddeduction amounting to Rs.5,79,01,415/-. The assessee couldestablish before the ITAT that it is entitled to claim the expenses,salaries etc. and the Tribunal disallowed the weighted deductionamounting to Rs.2,89,50,708/-. The assessee claims to haveincurred the said expenses for utilising the services of anemployee working in the subsidiary of the assessee and thesalaries paid in this behalf to the personnel employed by the 10.The circumstances relating to substantial question No.3 are that the assessee under Section 35(2AB) claimed weighteddeduction amounting to Rs.5,79,01,415/-. The assessee couldestablish before the ITAT that it is entitled to claim the expenses,salaries etc. and the Tribunal disallowed the weighted deductionamounting to Rs.2,89,50,708/-. The assessee claims to haveincurred the said expenses for utilising the services of anemployee working in the subsidiary of the assessee and thesalaries paid in this behalf to the personnel employed by the assessee. The ITAT accepted the claim of assessee under Section35(2AB) in respect of Rs.3,89,00,000/- being salary paid to PeterBecker in charge of the All India facility at Limda (Gujarat). Theassessee also claimed a further sum of Rs.1,89,00,000/- spenttowards clinical trial activities for testing new tyres outsideIndia. The A.O. in the draft assessment order noted that theamount has been incurred outside the in-house facility and is,therefore, not eligible for claiming weighted deduction. Thecase of assessee that the trial of R & D Products undertaken bythe assessee at its facility in Germany, satisfy the meaning ofclinical trial was rejected. Thus, the amount spent on clinicaltrial amounting to Rs.94,98,220/- has beennegatived. TheTribunal allowed the claim and the finding recorded by theTribunal reads as follows: "21. It is pertinent to mention here that Section 35(2AB)was introduced as an incentive for encouraging researchand development in the industrial sector and therefore,has to be liberally construed in view of the decision of Hon'ble Supreme court in Bajaj Tempo Ltd. V CIT, 62Taxman 480. The AO and the DRP have misdirectedthemselves in not appreciating the true intent andpurport of Section 35(2AB) of the Act. Having notdisputed the fact that these tests are part of R & Dactivities conducted by the appellant in Baroda, thedisallowance in the present facts is not permissible. We,therefore, hold that the appellant is entitled fordeduction under Section 35(2AB) of the Act. GroundNo.7 and 7.1 are allowed. 22. Ground Nos.8 and 8.1 pertain to the disallowance ofbusiness loss of Rs.4,07,24,151/- incurred by the assesseeon the sale of its wholly own subsidiary. In the yearunder consideration, the appellant company has shown aloss of Rs.4,07,24,151/- on the sale its 100% share holdingin Apollo Tyres A.G., Switzerland (ATAG) to Apollo TyresCyprus Pvt. Ltd. (ATC). The said loss has been claimed asbusiness expenditure. During the course of assessment,the appellant submitted that the ATAG was set up in2007 as 100% subsidiary of the appellant company withan objective of undertaking sales and marketing of theproducts of the brand of the appellant company and theinvestment was made in the subsidiary company as ameasure of commercial expediency. The AO in the draftassessment order was of the view that the saidinvestment in shares cannot be held as business activityas the appellant was itself showing the said shares underthe head investment. The DRP confirmed the draftassessment order in this regard." 10.1 Mr.Christopher Abraham relies on Section 35(2AB) and contends with considerable force that the Tribunal hasliberally construed the incentive provided as weighted deduction ITA No.44/2017 10.1 Mr.Christopher Abraham relies on Section 35(2AB) and contends with considerable force that the Tribunal hasliberally construed the incentive provided as weighted deduction ITA No.44/2017 under Section 35(2AB) of the Act. The expenses claimed on thetrial runs are accepted. Weighted deduction amounting to 50%on the actual amount spent is also granted by expanding thescope and applicability of Section 35(2AB). The provision inSection 35(2AB) since being an incentive provision, the Tribunalcould have done well, by firstly reading the section literally andapplying the case pleaded by the assessee to the unambiguousexpression in Sec.35(2AB). The claim of assessee for weighteddeduction does not satisfy the basic requirements of Section35(2AB). Therefore, the disallowance by the Assessing Officer iscorrect and legal, the view taken by the Tribunal, particularly, byplacing reliance on Cadilacase suffers from a serious infirmity inlaw. He prays for setting aside the view of the Tribunal byanswering the question in favour of revenue. 10.2 Mr.Joseph Markos contends that the assessee hasutilised the available in-house facilities and brought into existence a few next generation tyres. The assessee does nothave a suitable track or facility to test the tyres developed at theR&D facility, Limda. The clinical trial/track expenses claimed bythe assessee are for utilising the facility of assessee's ownsubsidiary in Germany. As a matter of fact, though the facility inGermany is not an approved facility, but the expenses claimed bythe assessee originate from the approved R&D facility and arecontinued till the product is satisfactorily cleared by R & D. Theexpenses which are admitted for utilising the facility ofassessee's subsidiary in Germany are rightly allowed. On thesame analogy the weighted deduction is rightly held in favour ofassessee by the Tribunal. 10.3 The substantial question deals with the incentivegranted by the Act in a few circumstance. Section 35(2AB) readsas follows: "Where a company engaged in the business of (biotechnology or in any business of manufacture or production of any article or thing, not being anarticle or things specified in the list of 11[th] scheduleincurs any expenditure on scientific research(notbeing expenditure in the nature of cost of any landor building) on in-house research and developmentfacility as approved by the prescribed authoritythen, there shall be allowed a deduction of a sumequal to [one and one half] times of expenditure soincurred: Provided that where such expenditure on scientificresearch (not being expenditure in the nature ofcost of any land or building) on in-house researchand development facility is incurred in a previousyear relevant to the assessment year beginning onor after the Ist day of April, 2021, the deductionunder this clause shall be equal to the expenditureso incurred. Explanation—For the purpose of this clause,"expenditure on scientific research", in relation todrugs and pharmaceuticals, shall includeexpenditure incurred on clinical drug trial,obtaining approval from any regulatory authorityunder any Central, state or Provincial Act and filingan application for a patent under the Patents Act,1970 (39 of 1970). 10.4 Section 35 deals with expenditure on scientific research and the procedure to be followed on computation ofbusiness income of the assessee. The question does not relate toregular revenue expenditure incurred by the assessee for the ITA No.44/2017 new version of radial tyres. But it deals with incentive in the nature of weighted deduction provided for by Sec.35(2AB). Theincentive can be claimed by the assessee only upon satisfying theconditions set out by Section 35(2AB) as weighted deduction.Section 35 (2AB) reads as follows: 10.4 Section 35 deals with expenditure on scientific research and the procedure to be followed on computation ofbusiness income of the assessee. The question does not relate toregular revenue expenditure incurred by the assessee for the ITA No.44/2017 new version of radial tyres. But it deals with incentive in the nature of weighted deduction provided for by Sec.35(2AB). Theincentive can be claimed by the assessee only upon satisfying theconditions set out by Section 35(2AB) as weighted deduction.Section 35 (2AB) reads as follows: "Where a company engaged in the business of (biotechnology or in any business of manufacture orproduction of any article or thing, not being an article orthings specified in the list of 11[th] schedule incurs anyexpenditure on scientific research(not being expenditurein the nature of cost of any land or building) on in-houseresearch and development facility as approved by theprescribed authority then, there shall be allowed adeduction of a sum equal to [one and one half] times ofexpenditure so incurred. " 10.5 The assessee satisfies that it is engaged in the business of manufacture of an article or thing i.e. tyres and tyres are notincluded in the Eleventh schedule and now, the assessee claimsexpenditure on scientific research towards clinical trials foravailing the facility of its subsidiary in Germany. The claim ofassessee does not satisfy the 2[nd] and 3[rd] limbs of Section 35(2AB) ITA No.44/2017 i.e. expenditure of scientific research on in-house research anddevelopment facility. The expenditure clears to be more in thenature of revenue expenditure and the expenditure is alsoincurred at a facility not approved by the prescribed authority. 10.6 In our considered view, the Tribunal fell in asubstantial error of law by not taking note of the qualifyingwords such as expenditure on scientific research on in-houseresearch and development facility as approved by the prescribedauthority. As rightly contended by Mr.Christopher Abraham,there is no need for liberal interpretation of a tax provisionwhen the language is unambiguous and grant an incentive notprovided by the Parliament to a set of cases. The incentive isadmissible only when the expenditure is incurred on scientificresearch on in-house research and development facility. Theobject of incentive is to encourage indigenisation of technologyand show up the know-howof the assessee/entrepreneurs. The ITA No.44/2017 Tribunal's conclusion is accepted the same opens a neweligibility facility without reference to approval by theprescribed authority for claiming incentive of weighteddeduction. The circumstances considered and the principle laidinCadilaHealthcare are completely distinguishable. He takes noteof the circumstances that the claim of the assessee nowencomposes revenue expenses said to have been incurred atassessee's subsidiary at Germany. The said expenditure allowedas weighted deduction then the words which have substantialmeaning in Section 35(2AB) of the Act viz. that in-house researchand development facility as approved by the prescribedauthority would become otiose. The preference to liberalinterpretation for literal construction is the correct principle.The meaning of words ought not to be stressed and strainedwhile constructing the application of a provision in a statute. Weare convinced that the Tribunal fell in a serious error by ITA No.44/2017 -34- accepting the claim of assessee for weighted deductionamounting to Rs.94,98,220/-. The assessee fails to establishessential requirements for claiming weighted deduction.Therefore the conclusion recorded by the Tribunal warrantsinterference under Section 260A of the Act and the question isanswered in favour of the revenue and against the assessee. Substantial Question No.4 ITA No.44/2017 -34- accepting the claim of assessee for weighted deductionamounting to Rs.94,98,220/-. The assessee fails to establishessential requirements for claiming weighted deduction.Therefore the conclusion recorded by the Tribunal warrantsinterference under Section 260A of the Act and the question isanswered in favour of the revenue and against the assessee. Substantial Question No.4 "Whether the Hon'ble ITAT, in the facts andcircumstances of the case, is correct in allowing loss ofRs.4,07,24,151/- on transfer of 100% shareholding ofassessee company in its AE Apollo tyres A.G.Switzerland(ATAG) to another Apollo Tyres, Cyprus Pvt.Ltd.(ATC) asrevenue loss and the contention of the assessee that thesame was incurred out of commercial expediency. 4.1Whether the Hon'ble ITAT, in the facts andcircumstances of the case and in law is correct inapplying the judgment of the Hon'ble Supreme court inSA Builders reported in 288 ITR 01 to allow the aboveclaim? 11. ITA No.44/2017 -35- sold its 100% shareholding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyrus Pvt.Ltd., (ATC). The assessee hadshown a loss of Rs.4,07,24,151/- on sale of its share in ATAG in favour of ATC. The said amount is claimed as businessexpenditure and sale of shares is necessitated by businessexpediency. DRP examined the total circumstances surrounding the sale of assessee's interest in one subsidiary, in favour ofanother subsidiary and rejected the claim by recording a findingas follows: "11.6 It is also pertinent to point out that insubmissions to ground no eighteen where the issue ofinterest charge on convertible loan given to thesubsidiary ATAG has been contested the assessee hasaverred as follows: In this regard, it is respectfully submitted that the AE isprincipally an investment company/brand owningcompany, without clearly identified operating businessrevenue streams and does undertake any operatingactivity.11.7From the above averments available in thesubmissions made before the DRP it is revealed thatthe claim of commercial expediency made by theassessee on the ground that ATAG a Swiss basedsubsidiary was undertaking marketing relatedactivities of the assessee in Singapore is entirely fallacious and not supported by a shred of evidence.The loss on sale of the subsidiary ATAG is a made upaffair, contrived to enable the assessee to claim adeduction from its taxable income. This objection ofthe assessee therefore deserves to be rejected.". 11.1 The Assessing Officer in Annexure-D order held that: "11.3 The facts, for A.Y.2010-11 are totally differentfrom those of the A.Y.2002-03. In the relevant A.Y.2002-03. In the relevant A.Y. 2002-03, the assesseecompany has sold the subsidiary concern to anothersubsidiary concern and the resultant capital loss hadbeen claimed as business loss. Hence, the reliance ofthe assessee on the order of the ITAT for A.Y. 2002-03in totally misplaced as the facts were totally differentin A.Y.2002-03. 11.4The investment was made by the assessee in aseparate juridical corporate entity. The transactionbetween the two distinct, separate legal entities aresubject to tax in their respective hands. Theaccretion/enhancement or decease in the value ofinvestment is dependent on various factors. Merelybecause the said entity ATAG was doing businesstransaction with the assessee, the investment in sharescannot be held as a business activity. In fact, theassessee itself is showing the said shares under theinvestment. As the assessee has incurred loss on saleof its investment in shares, the resultant loss cannot beallowed a business loss. Considering the abovementioned facts,claim of loss of Rs.4,07,24,151/- wasdisallowed by the AO in the Draft Order. The DRPafter considering the objections raised by theassessee has upheld that the additions made by theAO is in order. Accordingly, Rs.4,07,24,151, is added -37- -37- back to the total income. 11.2 On the contrary, the Tribunal examined the cl