MADHYA GUJARAT VIJ CO. LTD.,VADODARA vs. THE DY.CIT, CIRCLE-2(1)(1) , VADODARA

0 The learned Commissioner of Income Tax (Appeals), NFAC has erred in law and on facts in confirming the addition of ₹1.84,16,10,000/- on account of Capital Grants, Subsidies and Consumers Contribution by arbitrarily holding that 15% of the total grants/subsidies/consumer contribution received during the year is required to be transferred, as against 5.28% offered by the appellant, without appreciating the correct accounting treatment, factual matrix and settled position in the appellant's own case

1 The learned Commissioner (Appeals), NFAC failed to appreciate that in the appellant's own case for the earlier assessment years, the Hon'ble ITAT has consistently set aside identical additions with specific directions to the Assessing Officer to apportion the capital grants and subsidies to the respective fixed assets and allow depreciation thereon in accordance with law, instead of making ad hoc or percentage-based disallowances.

2 The learned Commissioner (Appeals), NFAC has erred in not considering that, in compliance with the directions of the Hon'ble Tribunal, the appellant has prepared detailed workings year after year by allocating the capital grants and subsidies to Plant & Machinery, being the principal block of assets in the appellant's capital structure, and by re-computing depreciation accordingly, which workings were submitted before the Assessing Officer. 13 The learned Commissioner (Appeals) NFAC failed to appreciate that the Assessing Officer, while giving effect to the Tribunal's orders in earlier years, has repeatedly rejected the appellant's workings without cogent reasons and without suggesting any alternative scientific of asset-wise basis of apportionment, thereby effectively nullifying the binding directions of the Hon'ble Tibunal

4 The learned Commissioner (Appeals), NFAC further erred in law in sustaining the impugned addition by mechanically following the approach adopted in earlier assessment orders without independently examining whether the Assessing Officer had correctly and faithfully implemented the Tribunal's directions, and without addressing the appellant's specific grievance regarding non-compliance with judicial orders

5 The learned Commissioner (Appeals), NFAC failed to appreciate that repeated confirmation of the addition, notwithstanding consistent remand by the Hon'ble ITAT on the same issue in the appellant's own case, violates judicial discipline, renders the issue no longer res integra, and results in avoidable multiplicity of proceedings.

6 The appellant therefore prays that the impugned addition of ₹1,84,16,10,000/- be deleted and appropriate directions be issued to allow depreciation after proper apportionment of capital grants and subsidies in accordance with the binding orders of the Hon'ble Tribunal.

0 The learned Commissioner of Income Tax (Appeals), NFAC has erred in law and on facts in upholding the restriction on carry forward of unabsorbed business losses and unabsorbed depreciation of earlier years solely on the basis of assessed figures, ignoring that the said figures are under challenge in pending appeals and have not attained finality, thereby causing grave prejudice to the appellant.

0 The appellant craves leave to add to, alter, delete or modify any of the above ground of appeal either before or at the time of hearing of this appeal.

Ld. Counsel for the assessee submitted that this issue was considered by the Co-ordinate Bench of this Tribunal in assessee's own case in ITA Nos. 2080/Ahd/2012 and Ors. dated 18.08.2023 which has followed earlier years order in ITA No.2583/Ahd/2010 dated 09.11.2016 relating to the Assessment Year 2006-07 wherein this issue was set aside to the Ld. A.O. as follows: “...

We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the issue in the dispute regarding the recognition of income on account of government grants and customer contribution in the case of present assessee was also there in the AY 2006-07 which has been adjudicated by the ITAT in ITA No. 2583/Ahd/2010 vide order dated 09.11.2016 wherein it was held that receipt of grants was in connection with capital assets. Therefore, the same is required to be reduced from the cost of the capital as prescribed under section 43(1) read with explanation 10 to section 43(1) of the Act. However, the issue has been restored back to the A.O. to adjudicate afresh after verifying the amount of grants to be apportioned relating to different assets and calculate the amount of depreciation allowance accordingly. The relevant finding of the coordinate bench reads as under:

We have heard the rival contentions and perused the material on record. Through this ground assessee has challenged the order of Id. CIT(A) sustaining the disallowance of depreciation at Rs. 10,84,81,976/-by observing that capital subsidy and grant received are to be reduced from fixed asset and depreciation to be allowed on the remaining balance. We observe that the Government gives grant/subsidy to the holding company and then it is allocated to the assessee which is one of the subsidiary company and further such subsidy are not granted to actually to meet the cost but are granted as an inclusive of rural economically backward unviable areas. Assessee received subsidies on different schemes viz Rural Electrification and Tribal area Electrification and the assets cannot be bifurcated into Rural/Tribal area etc.

1 There is no dispute to the fact that the grants received from the Government are capital in nature but they have not been given specifically for acquiring a particular asset. In such situation provision of section 43(1) Explanation 10 of the Act squarely applies for the treatment of such capital grant. Relevant provisions of section 43(1) of the Act read as under:

In sections 28 to 41 and in this section, unless the context otherwise requires (1) actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met96 directly or indirectly by any other person or authority: Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, but before the 1st day of March, 1975, and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees./ Explanation 10-Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee: Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

2 Proviso to Explanation -10 to section 43(1) contemplates that subsidy or grant or reimbursement which cannot be relatable to the assets acquired then grant amount to be apportioned in the assets at the same proportion as such assets bears all the assets. We further observe that Id. Assessing Officer has given following finding for application of explanation -10 to section 43(1) by observing as follows.

2 The contention of the assessee that Consumer's Contribution and Capital Grant are capital in nature is found tenable, but its treatment, of 10% thereof transferred to P & L account every year is not in accordance with the provisions of the Act. As envisaged in explanation 10 to section 43(1), where a portion of the cost an asset acquired by the assessee has been met directly or indirectly by the Central Government or State Gout or any Authority established under any law, or by any other person, in the form of subsidy or grant or reimbursement then in a case where the subsidy is directly relatable to the asset, such subsidy shall not be included in the actual cost of the assets. In a case, where such subsidy or Grant or - 6– reimbursement, is of such nature that, it cannot be directly relatable to any particular assets, so much of the amount which bears to the total subsidy or reimbursement or Grant the same proportion as such asset bears to all the assets in respect of which or with reference to which such grant or subsidy or reimbursement is received shall no be included in the actual cost of that assets to the assessee.

3 In view of the clear provisions of the Act as stated supra and the assessee himself have admitted that the subsidy and grant received are towards Capital assets, the assessee should have reduced the same from the Capital asset to arrive at the actual cost. However the assessee has failed to do so and also not furnished the details of fixed assets in respect of which the subsidy and grants have been received. Hence and inference is drawn that the Gout grants/subsidy and consumers' contribution are relatable to fixed assets of plant & machinery. The assessee has claimed depreciation on Plant & Machinery as under:

3 We further observe that similar type of issue came up before the Tribunal in the case of GETCL(supra) which was adjudicated by the Co ordinate Bench by observing as follows:

We find that in the instant case, the CIT(A) held that excess depreciation claimed on account of capital grant comes to Rs. 18.93 crores being 15% of Rs. 176,62,04,718/, Le Rs.26,49,30,708/-minus Rs. 17,20,37,655/-, which amounts to Rs. 9,28,93,053/-, and 15% of Rs.6427.94 lakhs amounting to Rs.964.191 lakh. The submissions of the assessee before us is that the uniform rate of Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

2 Proviso to Explanation -10 to section 43(1) contemplates that subsidy or grant or reimbursement which cannot be relatable to the assets acquired then grant amount to be apportioned in the assets at the same proportion as such assets bears all the assets. We further observe that Id. Assessing Officer has given following finding for application of explanation -10 to section 43(1) by observing as follows.

2 The contention of the assessee that Consumer's Contribution and Capital Grant are capital in nature is found tenable, but its treatment, of 10% thereof transferred to P & L account every year is not in accordance with the provisions of the Act. As envisaged in explanation 10 to section 43(1), where a portion of the cost an asset acquired by the assessee has been met directly or indirectly by the Central Government or State Gout or any Authority established under any law, or by any other person, in the form of subsidy or grant or reimbursement then in a case where the subsidy is directly relatable to the asset, such subsidy shall not be included in the actual cost of the assets. In a case, where such subsidy or Grant or reimbursement, is of such nature that, it cannot be directly relatable to any particular assets, so much of the amount which bears to the total subsidy or reimbursement or Grant the same proportion as such asset bears to all the assets in respect of which or with reference to which such grant or subsidy or reimbursement is received shall no be included in the actual cost of that assets to the assessee.

3 In view of the clear provisions of the Act as stated supra and the assessee himself have admitted that the subsidy and grant received are towards Capital assets, the assessee should have reduced the same from the Capital asset to arrive at the actual cost. However the assessee has failed to do so and also not furnished the details of fixed assets in respect of which the subsidy and grants have been received. Hence and inference is drawn that the Gout grants/subsidy and consumers' contribution are relatable to fixed assets of plant & machinery. The assessee has claimed depreciation on Plant & Machinery as under:

3 We further observe that similar type of issue came up before the Tribunal in the case of GETCL(supra) which was adjudicated by the Co ordinate Bench by observing as follows:

We find that in the instant case, the CIT(A) held that excess depreciation claimed on account of capital grant comes to Rs. 18.93 crores being 15% of Rs. 176,62,04,718/, Le Rs.26,49,30,708/-minus Rs. 17,20,37,655/-, which amounts to Rs. 9,28,93,053/-, and 15% of Rs.6427.94 lakhs amounting to Rs.964.191 lakh. The submissions of the assessee before us is that the uniform rate of 15% adopted by the CITIA) is not justified. As per provisions of section 43/1) of the Act, the capital grant should be reduced from the cost/WDV of the relevant asset, and thereafter the depreciation is to be calculated. Thus, the capital grant receipt in respect of asset, on which depreciation is allowable at the rate different from 15% should be worked out as per the applicable rate. The DR could not point out any mistake in - 8– the above submission of the assessee which we find is in accordance with law. We, therefore, set aside the orders of the lower authorities on this issue, and restore the matter back to the file of the AO for adjudication afresh after verifying the proportionate amount of grant relating to different asset, and applying the actual rate of depreciation which relate to these assets. Thus, this ground of appeal of the assessee is allowed for statistical purpose.

4 In the light of the decision of the Co-ordinate Bench discussed above and in the light of proviso to Explanation -10 to section 43/1) of the Act we find it justified to restore the issue back to the file of Assessing Officer to adjudicate afresh after verifying the apportioned amount of grant relating to different assets and calculate the depreciation at the rates applicable to such assets. Needless to mention that all necessary details shall be provided by the assessee to the Assessing Officer in order to calculate the correct amount of depreciation, Ld. Assessing Officer to provide proper opportunity of being heard should be given to the assessee. Accordingly. this ground of assessee is allowed for statistical purposes

1 The above finding of the of the coordinate bench has been followed in the subsequent year Le. A.Y. 2008-09 in ITA No. 1709/Ahd/2018 vide order dated 28-2-2022. Therefore, following the concurrent view taken by the ITAT, we hereby restore the issue to file of the AO for fresh adjudication in accordance with the direction of the ITAT in assessment year 2006-07 and as per the provision of law. Hence the ground of the assessee is hereby allowed for statistical purposes."