This appeal has been filed by assessee against order dt. 16th Feb., 1995 of CIT(A)-XIV, Mumbai. Original grounds of appeal were not in consonance with r. 8 of ITAT Rules and, therefore, as directed by Bench revised grounds of appeal have been filed by assessee. first ground of appeal pertains to confirmation by learned CIT(A) of disallowance of depreciation of Rs. 24,29,913 made by AO in respect of assets of new MAP manufacturing unit. relevant facts, briefly stated, are that during previous year relevant to assessment year under appeal assessee set up new project for manufacturing of MAP. assessee claimed depreciation on plant and machinery, factory building and other assets of this unit on ground that said unit became functional during this year and trial production was started. It was also claimed that assessee was already engaged in business of manufacturing of dyes and chemicals. new unit for manufacturing another chemical known as MAP was only extension or expansion of assessee s existing business. AO disallowed claim on ground that MAP unit was independent unit and since commercial production was not started during year, depreciation was not admissible. It was further observed by AO that after some experimental trial production, manufacturing of MAP was not found to be commercially feasible by assessee-company and, therefore, this manufacturing unit was abandoned and assessee resorted to massive modifications in plant for manufacturing of another chemical, this factor was also considered by AO while disallowing assessee s claim for depreciation. When matter came up before CIT(A), assessee contended that MAP project was integral part of existing line of assessee s business. It was pointed out that trial production was carried out from October, 1991 to February, 1992 which amounted to actual use of plant and machinery for manufacturing process. assessee relied on several judicial pronouncements before learned CIT(A) in support of proposition that if plant and machinery has been used for trial production, depreciation is admissible. learned CIT(A) considered these submissions and he recorded finding that MAP unit was new unit and cannot be said to be extension of existing business of assessee. learned CIT(A) has referred to auditor s report relevant portion of which has been reproduced at pp. 10 and 11 of order of CIT(A). learned CIT(A) observed that construction of this new unit was commenced in year 1987 and during present year construction of project reached advanced stage of completion but following several adverse factors project became commercially unviable. learned CIT(A) has observed that merely because trial runs were conducted during later part of accounting year, it does not establish assessee s claim for depreciation. Trial runs proved abortive and commercially production could not be started. learned CIT(A) was of view that since trial runs did not culminate in commercial production it cannot be said that plant and machinery were used for purpose of business. product for which plant and machinery were installed was never produced by assessee. learned CIT(A), therefore, confirmed finding of AO that assessee is not entitled to depreciation. learned counsel appearing for assessee, Shri Pradip Kapasi, argued before us that assessee was also engaged in business of manufacturing dyes and chemicals and setting up manufacturing unit for MAP was only step in extension of existing business activity. learned counsel, for this proposition, relied on following judgments: (i) CIT vs. Tata Chemicals Ltd. (2002) 175 CTR (Bom) 443: (2002) 256 ITR 395 (Bom); (ii) B.R. Ltd. vs. V.P. Gupta, CIT 1978 CTR (SC) 82: (1978) 113 ITR 647 (SC); (iii) Kalyani Steels Ltd. vs. Dy. CIT (1997) 59 TTJ (Pune) 316: (1997) 62 ITD 233 (Pune). Regarding admissibility of assessee s claim for depreciation, learned counsel contended that plant and machinery was actually used for purposes of assessee s business during this year and trial production was carried out. For this purpose raw material was purchased by assessee. learned counsel invited our attention to pp. 97 to 114 and pp. 120 and 121 of paper book to emphasise his point that plant and machinery was subjected to trial runs over long period of time during previous year from 11th Oct., 1991 to 8th Feb., 1992. relevant pages of paper book contain details and charts regarding trial runs of plant and machinery during aforesaid period. For proposition that if plant and machinery has been subjected to trial production, depreciation is allowable, learned counsel drew support from following cases: (i) CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC); (ii) V. Ramakrishna & Sons Ltd. vs. CIT (1984) 149 ITR 554 (Mad); (iii) CIT vs. Industrial Solvents & Chemicals (P) Ltd. (1979) 8 CTR (Bom) 124: (1979) 119 ITR 608 (Bom); (iv) Asstt. CIT vs. Ashima Syntex Ltd. (2001) 169 CTR (Guj) 102: (2001) 251 ITR 133 (Guj). learned CIT-Departmental Representative, Shri B.R. Meena, kly supported orders of Revenue authorities and contended that assessee s claim for depreciation has been rightly disallowed by Revenue authorities as commercial production was not commenced during year and even manufacturing of MAP was abandoned by assessee. He pointed out that learned CIT(A) has recorded clear finding that trial production was mere eyewash. learned CIT-Departmental Representative relied on following judgments: (i) Dineshkumar Gulabchand Agrawal vs. CIT (2004) 267 ITR 768 (Bom); (ii) CIT vs. Udaipur Mineral Development Syndicate (P) Ltd. (2003) 184 CTR (Raj) 384: (2004) 269 ITR 263 (Raj); (iii) E.I.D Parry (India) Ltd. vs. CIT (2002) 177 CTR (Mad) 563: (2002) 257 ITR 253 (Mad); (iv) L.M. Chhabda & Sons vs. CIT (1967) 65 ITR 638 (SC); (v) Orient Cosmetics Ltd. vs. Dy. CIT (2000) 69 TTJ (Mad) 490: (2000) 74 ITD 135 (Mad). We have given careful consideration to elaborate submissions made before us on behalf of assessee as well as Department and have gone through relevant facts in light of various cases cited before us. At outset it must be mentioned that each case turns on its peculiar facts. Insofar as present case is concerned there is no dispute about factual position. assessee is already engaged in manufacturing of dyes and chemicals of different varieties. assessee proposed to set up new manufacturing unit for production of MAP which was entirely new product not hitherto manufactured by assessee. For this purpose construction of new unit was commenced in year 1987. entire expenditure incurred has been capitalized by assessee. After considering facts and circumstances we are not inclined to accept proposition of learned counsel that setting up of new manufacturing unit was only extension of existing manufacturing facility of assessee. In our view MAP unit must be considered to be new unit. learned counsel has strenuously argued before us that there is unity of management and intermingling and interlacing of finance and control and, therefore, MAP unit must be considered to be integral part of existing business. In our view, having regard to overall facts of present case, cases cited by learned counsel for assessee do not apply. Coming to question as to whether assessee is entitled to depreciation, we are of view that Revenue authorities were not justified in rejecting assessee s claim for depreciation. facts having bearing on this issue have already been stated above. relevant part of ratio of Bombay High Court judgment in case of Industrial Solvents & Chemicals (P) Ltd. (supra) may be reproduced below: "Held, that Tribunal had found that assessee-company did obtain some reasonable quantity of finished product on running of its factory on some days between 19th Aug., 1961, and 11th Sept., 1961, but finished product obtained by assessee could be termed as sub-standard. It cannot be contended that because end product then obtained was not of proper standard, business of assessee cannot be said to have been set up though plant was being worked. Therefore, on finding of Tribunal, assessee-company could be regarded as having set up its business by 19th Aug., 1961, and not in February, 1961, and it would be entitled to expenses incurred thereafter as expenses incurred in course of its business. admissible business loss would have to be calculated by ITO as from 19th Aug., 1961, and on same basis depreciation and development rebate admissible to assessee-company would have to be determined." Madras High Court in case of V. Ramakrishna & Sons Ltd. (supra) held that development rebate is allowable in respect of plant and machinery which has been subjected to trial runs. Gujarat High Court in case of Ashima Syntex Ltd. (supra) also held that even if plant and machinery is used for very short duration for trial run, depreciation will be allowable. reference may now be made to judgments relied upon by learned CIT-Departmental Representative. First of all Bombay High Court decision in case of Dineshkumar Gulabchand Agrawal (supra) may be considered. This is short judgment and it may be appropriate to reproduce below full text of this judgment: "Learned counsel appearing on behalf of appellant has raised question as framed in appeal memo and tried to contend that even if vehicle was not actually used but since it was ready for use, assessee was entitled to claim benefit of depreciation on such assets. He sought to place reliance on judgment of this Court in case of Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom). In above judgment, this Court was concerned with interpretation of expression use , or used whereas we are concerned with interpretation of word used . It appears that after above judgment, there was amendment to s. 32 of IT Act. word used denotes actually used and not merely ready for use. expression used means actually used for purposes of business. view is taken by Tribunal. In this view of matter, no substantial question of law is involved. appeal is dismissed in limine with no order as to costs." From above, it may be seen that it has been held by Bombay High Court that expression "used" in s. 32 means actually used for purpose of business. If plant and machinery is kept merely ready for use, depreciation is not available to assessee. Similar view has been expressed by Rajasthan High Court in case of Udaipur Mineral Development Syndicate (P) Ltd. (supra). relevant observations of High Court may be reproduced below from p. 265 of report: "However, depreciation is permissible only in cases where machinery has been actually used for production. When machinery in question was not put to use in year under consideration even for day and business remained closed, there is no justification to allow depreciation on such machinery which has not been used even for day in whole year. Tribunal has committed error in allowing depreciation on machinery which has not been used even for day in previous relevant year in question." It may be seen that in above case machinery was not used even for day in previous relevant year. learned CIT-Departmental Representative has also relied on Tribunal, Madras Bench decision in case of Orient Cosmetics Ltd. (supra). In that case it was held that if no commercial production or trading activity had been started and only trial run had been carried out, investment allowance and depreciation will not be allowable. We feel that this issue is required to be decided in consonance with binding decision of Bombay High Court in case of Dineshkumar Gulabchand Agrawal (supra). Here it may be mentioned that number of High Courts have held that even if plant and machinery is kept ready for use, depreciation is allowable. In other words High Courts have endorsed view that if asset is subjected to passive use, assessee cannot be denied benefit of deduction. However, in view of Bombay High Court decision expression used must be interpreted as having been actually used for purpose of business. Now question arises as to whether in case where plant and machinery is subjected to trial runs for trial production on experimental basis, it can be said that such plant and machinery has been actually used for business purposes. In present case, assessee set up new unit for manufacturing of MAP and this unit became critical during previous year, relevant year to assessment year under appeal. plant and machinery was not only ready for use but it was subjected to trial run over long period of time from October, 1991 to February, 1992 during previous year. Such trial running of plant and machinery is normal feature of any industrial or manufacturing unit. For such trial runs, raw material is purchased by assessee and plant and machinery is subjected to actual manufacturing process. In present case after trial runs and trial production over long period of time, assessee felt that product was not commercially feasible and, therefore, manufacturing of such product was abandoned and plant and machinery was subjected to certain modifications for production of another item. Such other item was actually manufactured and marketed by assessee and depreciation has been duly allowed by AO in succeeding assessment year. question is whether in facts and circumstances mentioned above it can be said that plant and machinery has been used for purposes of assessee s business. There is no dispute that MAP unit was set up by assessee for its manufacturing and business purposes. There is also no dispute that plant and machinery was subjected to trial runs over long period of time. Merely because commercial production could not be started and trading of such goods could not be commenced during this year, in our view, it cannot be said that plant and machinery was not used for business purposes. depreciation allowance has been provided in IT Act to take care of wear and tear of depreciable assets. It is logical that if plant and machinery has been actually run, albeit for trial production, depreciation should be allowed. Bombay High Court has only observed that depreciation is allowed only when plant and machinery is actually used for business purposes. In our view, trial production or trial running o f plant and machinery entails actual use of plant and machinery for business purposes. AO is, therefore, directed to allow depreciation as per provisions of law. Since actual trial production commenced in month of October, 1991 and continued till February, 1992, plant and machinery has been used for period of less than 180 days in previous year, and, therefore, depreciation may be restricted to 50 per cent of admissible amount. It may be mentioned that this finding will have impact upon subsequent assessment years as WDV carried forward from year to year will have to be modified accordingly. AO shall accordingly recompute depreciation allowable during all subsequent assessment years. Ground No. 2 pertains to disallowance of interest of Rs. 23,01,836 relating to borrowings used for MAP project. We have heard both sides on this issue and have gone through facts. Revenue authorities have disallowed interest on ground that borrowed funds were utilized for investment in new project and, therefore, till project commences production, interest expenditure has to be capitalized and added to cost of project. facts have already been narrated while dealing with first ground of appeal. learned counsel kly relied on Bombay High Court judgment in case of Tata Chemicals Ltd. (supra) and Gujarat High Court decision in case of Dy. CIT vs. Core Healthcare Ltd. (2001) 169 CTR (Guj) 416: (2001) 251 ITR 61 (Guj). learned Departmental Representative supported orders of Revenue authorities and relied on Expln. 8 under s. 43 of IT Act. After considering rival submissions vis-a-vis facts of case, in our view, assessee must succeed on this issue. Gujarat High Court in case of Core Healthcare Ltd. (supra) had considered similar issue and it would be appropriate to reproduce below relevant part of ratio of this case from headnote: "Sec. 36(1)(iii) of IT Act, 1961, is absolutely clear. It provides that amount of interest paid in respect of capital borrowed for purchases of business shall be allowed in computing income referred to in s. 28 of Act. It is settled legal position that interest paid/payable has to be in respect of capital borrowed for purposes of business; section nowhere stipulates that such borrowing has to be only on revenue account. only requirement is that interest must have been incurred for purpose of capital borrowings made for purpose of business. There is inherent indication in Act that any expenditure which is in nature of capital expenditure would not be allowable as deduction while computing income chargeable under head Profits and gains of business or profession as laid down in s. 37 of Act; but in same section portion in parentheses lays down that such expenditure has to be not being expenditure of nature described in ss. 30 to 36 . Therefore, there is specific provision dealing with interest paid/payable in respect of borrowings incurred for purposes of business and hence general provision, viz., s. 37 of Act cannot come into play. Therefore, whether interest is paid for borrowing which is utilized for acquisition of capital asset or which is utilized for revenue purpose loses its distinction. view that interest which is capitalized, after commencement of business but before asset is first put to use cannot be allowed as revenue deduction s. 36(1)(iii) of Act is against plain language of provisions of Act. Whether legislature wanted to restrict allowance/deduction to particular type of expenditure specific provision has been incorporated in Act, as for example, provisions of ss. 37 and 35D. scope of s. 36(1)(iii) and Expln. 8 to s. 43(1) are different. They operate in separate fields and though both are relatable to computing income under s. 28 yet nature of deductions are entirely distinct from each other. concept and meaning of actual cost which is definition laid down in s. 43(1) of Act is for limited purpose, viz., at point of time when deduction is to be granted for purpose of wear and tear (s. 32) or incentive for purpose of setting up specified industry (ss. 32A and 33). term actual cost is applicable only in relation to asset as against phrase capital borrowed used in cl. (iii) of s. 36(1) of Act. term capital borrowed in said provision is of much wider import than phrase actual cost . Explanation 8 only lays down that where amount is paid/payable as interest in connection with acquisition of asset, so much of such amount as is relatable to any period after such asset is first put to use, shall not be included in actual cost of such asset. scope and ambit of this Explanation on plain reading is restricted to situation whereafter asset is first put to use interest which is paid/payable would never form part of actual cost. Explanation nowhere provides that interest pertaining to period prior to asset being first put to use will not be allowed as deduction under s. 36(1)(iii). Explanation 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc., on larger amount of actual cost. Neither in Notes on Clauses nor in Memorandum Explaining Provisions in Finance Bill, 1986, is there any indication that in converse situation interest has to be capitalized and further that such interest cannot be claimed as deduction under s. 36(1)(iii). Sec. 36(1)(iii) does not make any distinction between borrowing utilized to acquire capital asset or otherwise. In fact, phrase used in said provision is capital borrowed . Therefore, distinction about interest having been capitalized or not loses its significance, inasmuch as if capital is borrowed for purposes of business, interest is allowable as deductible item of expenditure under s. 36(1)(iii) while computing income under s. 28 of Act. There is no other prescription in provisions. assessee-company was principally engaged in business of manufacturing intravenous injections of two types large volumes parenteral i.e., LVP and sterile water for injection (small volumes parenteral), i.e., SVP. commercial production had commenced in February, 1988, and manufacturing capacity had been generally increased from time to time. During financial year ended on 13th March, 1992, company installed three more machines (in addition to existing three machines) for production of LVP and SVP resulting in substantial increase in capacity of manufactured products. assessee claimed deduction of Rs. 1,56,76,000 being interest paid towards borrowings made for purpose of acquiring new machinery. AO and CIT(A) rejected claim. Tribunal, however, allowed deduction." From above it would appear that Gujarat High Court has taken into account Expln. 8 to s. 43(1). This view also finds support from Bombay High Court decision in case of Tata Chemicals Ltd. (supra). Respectfully following precedents, AO is directed to allow deduction in respect of interest. Here also WDV of relevant assets may have to be modified in subsequent assessment years if interest has been added by AO to cost of assets. AO is directed accordingly to verify and take necessary action for subsequent assessment years. Ground No. 3 pertains to confirmation by learned CIT(A) of following disallowances made by AO in respect of IPU manufacturing unit: (i) Depreciation Rs. 19,60,131 (ii) Expenditure on power and fuel Rs. 26,53,965 (iii) Research & development expenditure Rs. 19,89,176 (iv) Interest Rs. 25,71,903 relevant facts may first be stated briefly. IPU unit was existing manufacturing unit of assessee. In this unit chemical called IPU was being manufactured by assessee even in previous year relevant to immediately preceding assessment year. Thus, IPU project commenced commercial production last year and was fully functional. During present assessment year production of IPU was stopped because of various reasons. assessee decided to switch over to produce different items in this unit through different process which required modifications/additions to plant and machinery of this unit. For this purpose substantial capital expenditure was incurred by assessee and such expenditure was capitalized in books o f account. Even items which are subject-matter of dispute before us were also treated by assessee as capital expenditure in books of account. In this unit also plant and machinery modified or newly installed was subjected to trial runs. Thus, factual position is not very much different from facts of MAP unit, except that this unit is not newly set up but was already in existence in preceding year. Revenue authorities disallowed claims made by assessee on ground that trial production does not amount to commencement of business and further expenditure was treated as capital expenditure in books of account of assessee. For similar reasons claim for depreciation was also disallowed. We have heard both sides in backdrop of abovementioned facts. Both sides have relied upon judicial pronouncements which have already been referred to and discussed while dealing with ground No. 1 raised by assessee. In our view in respect of IPU manufacturing unit assessee is on much ker footing. This unit was already existing in preceding assessment year and depreciation and other expenses were being allowed. During present year it was not found commercially feasible to continue producing same item and, therefore, in larger interest of business and to maintain profitability assessee discontinued production of IPU and carried out modifications/additions with view to produce other items. Obviously, this task has been taken by assessee in interest of business and further plant and machinery has been subjected to trial runs. For same purpose assessee has incurred research and development expenditure and expenditure on consumption of power and fuel as also interest expenditure on funds borrowed for purpose of modification of this unit. For reasons already elaborately stated by us above, we hold that assessee is entitled to relevant deductions including depreciation. orders of Revenue authorities on this issue are, therefore, reversed and AO is directed to allow expenses claimed by assessee under heads research and development expenditure , power and fuel expenditure and interest expenditure . AO is also directed to allow depreciation as per provisions of law after verifying period during which plant and machinery was actually used for trial runs. WDV of assets shall be modified for succeeding assessment years. last ground of appeal pertains to reduction in quantum of deduction claimed by assessee under s. 80-I of IT Act. relevant facts are that assessee claimed deduction under s. 80-I in respect of one of industrial undertakings eligible for such deduction. assessee claimed deduction of Rs. 54,28,290 which was restricted by AO to Rs. 20,83,666. assessee had maintained only one set of books of account in respect of all industrial units. Common accounts have been maintained for purchases as well as sales. Common manufacturing trading and P&L a/c have been maintained. assessee segregated profits attributable to relevant industrial undertaking which is also supported by auditors certificate. AO did not accept assessee s working as same could not be subjected to proper verification and, therefore, he estimated profits from industrial undertaking on basis of total turnover and average profit rate earned by assessee. AO worked out profit of relevant industrial undertaking and allowed deduction with reference to amount which bears to gross total income of assessee, same proportion as amount of turnover of relevant industrial undertaking bears to total turnover of assessee from all units. learned CIT(A) has confirmed order of AO on this issue. He was of view that P&L a/c of new industrial undertaking is not based on separate books of account and assessee itself has resorted to certain estimates by adopting different standards for different overheads. learned CIT(A) held that method adopted by AO was very logical. learned counsel appearing for assessee contended that working of assessee has been duly certified by auditors to be correct. He invited our attention to pp. 144 to 146 of paper book. Page 144 contains copy of certificate issued by auditors. Page 146 contains working of profit from industrial undertaking. learned counsel submitted that in view of auditors certificate and actual working of profit, Revenue authorities were not justified in reducing assessee s claim. learned CIT- Departmental Representative supported orders of Revenue authorities. We have carefully considered rival submissions and have gone through t h e facts. Admittedly, common books of account have been maintained and, therefore, correct profits which can be said to be derived from relevant industrial undertaking can be only matter of estimate. As per auditors certificate it is seen that raw material has been adopted on actual cost and wages have also been stated to be on actual basis. overheads including salaries have been apportioned on basis of consumption of raw material. Other non-allocable overheads have been bifurcated on basis of sales. Interest expenditure has been allocated to industrial unit on basis of consumption of raw material. In our view working of assessee cannot be said to be free from fault. overhead expenses have been allocated partly on basis of consumption of raw material and partly on basis of sales. Interest expenditure has been allocated on basis of consumption of raw material whereas same should be on basis of relevant borrowed funds which have been utilized in respect of relevant industrial undertakings. For these reasons profits estimated by assessee and certified by auditors cannot be said to be reliable. Under s. 80-I deduction is allowable strictly with cannot be said to be reliable. Under s. 80-I deduction is allowable strictly with regard to profits and gains derived from industrial undertaking. Since assessee has failed to maintain separate books of account for industrial undertaking, such profits have to be worked out only on basis of most logical basis. In facts and circumstances mentioned above, in our view basis adopted by AO appears to be fair and logical. learned CIT(A) has already directed AO to adopt correct figure of gross total income while computing profits and gains. We see no reason to interfere with finding of learned CIT(A) on this issue and, therefore, same is confirmed. In result, appeal stands partly allowed. *** ARLABS LTD. v. DEPUTY COMMISSIONER OF INCOME TAX