KISHORKUMAR SHAMJI vs. THE DEPUTY COMMISSIONER OF INCOME TAX

The assessee is engaged in processing and exporting of spices including pepper. During the previous year relevant for assessment 1997-98 assessee installed machinery for processing of goods for export which entitled it to a subsidy of Rs.8 lakhs from the Spices Board. The amount received is credited in the capital account and assessee neither returned it as income nor reduced the subsidy from the cost of plant and machinery for the purpose of depreciation while working out actual cost in terms of Section 43(1) of the Income Tax Act, 1961. Even though assessment was originally completed without reckoning the subsidy amount for any purpose, the Assessing Officer later rectified assessment order in exercise of the powers under Section 154 bringing to tax the entire subsidy amount of Rs.8 lakhs received from the Spices Board as revenue receipt in the form of income assessable under the Act. The correctness of the rectification proceedings was challenged in appeal before the CIT (Appeal) which rejected it. However, on second appeal filed by the assessee, the Income Tax Appellate Tribunal held reversing the order of the lower authorities that subsidy amount in this case is capital receipt not assessable as income under the Act. However, the Tribunal further proceeded to consider the applicability of Section 43(1) and directed recomputation of depreciation on plant and machinery by reducing subsidy amount from the cost of plant and machinery to arrive at the actual cost in terms of the said Section. It is against this order of the Tribunal, the assessee has come up before us in appeal under Section 260A raising two questions:- i) as to whether the Tribunal was justified in upholding the validity of the rectification made under Section 154 and ii) whether the Tribunal was justified in directing recomputation of cost of plant and machinery by reducing subsidy amount from actual cost in terms of Section 43(1) of the Income Tax Act.

We have heard senior counsel Shri. Sarangan appearing for appellant-assessee and Shri. Jose Joseph appearing for the respondent.

The contention raised by the assessee's counsel is that rectification in this case is not warranted because the question whether subsidy is of capital or revenue in nature itself is debatable and the same has to be decided with reference to the details of subsidy scheme under which it is granted. The standing counsel on the other hand contended that subsidy was granted for carrying on business and so much so the decision of the Hon'ble Supreme Court reported in Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax (228 ITR 253) squarely applies and therefore, it was rightly treated as income of the assessee. However, assessee's counsel has relied on the decision of the Hon'ble Supreme in Mepco Industries Ltd. v. Commissioner of Income Tax (319 ITR 208) wherein the Supreme Court has concluded that nature of subsidy being a debatable issue, it cannot be brought to tax through rectification of assessment. From the facts of this case we have to necessarily conclude that two views are possible as to whether subsidy received by the assessee in this case is a revenue receipt or whether it is a capital receipt because the assessing authority and the first appellate authority took one view that it is a revenue receipt whereas tribunal on facts found that it is a capital receipt not assessable as income, but it should be reduced to arrive at the actual cost of plant and machinery for the purpose of depreciation. The Supreme Court, in the decision reported in T.S.Balaram, Income Tax Officer v. Volkart Brothers (82 ITR 50) held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by long drawn process of reasoning on points on which there may be conceivably two opinions. The nature of subsidy in this case that is as to whether it is revenue receipt or capital receipt is not self-evident to treat it as not capable of more than one meaning. On the other hand the subsidy scheme was understood by three authorities viz., the assessing officer, the first appellate authority and the tribunal in two different ways. Therefore, intrinsically two opinions are possible about the type and nature of the subsidy and so much so it is a debatable issue on which two views are possible and therefore the subsidy cannot be brought to tax through rectification proceedings. The tribunal has not given any specific finding in this regard even though the assessee had specifically taken a ground in these lines. However, since we find that assessee's case squarely falls within the scope of judgment of the Supreme Court above referred, we allow the appeal on this issue by reversing the order of the Tribunal and that of the lower authorities and by declaring that no rectification proceedings under Section 154 is maintainable to bring to tax subsidy amount.

In view of our above findings the next question raised as to whether the Tribunal was justified in limiting the depreciation allowance on the actual cost of machinery reduced by subsidy amount has become academic in nature because since rectification proceedings itself is not tenable then even part disallowance of depreciation through rectification is also not possible. Even though counsel for the appellant contended that Tribunal has no power to enhance assessment and so much so they could not have made part disallowance of depreciation by reducing the subsidy from cost of machinery to arrive at actual cost under Section 43(1). We are unable to accept this contention because when the Tribunal finds that assessment of the amount of subsidy as revenue or income is not correct then it was open for the Tribunal to consider whether part disallowance is called for while computing depreciation benefit with specific reference of Section 43(1) of the Act. The Supreme Court in the case of Kapurchand Shrimal v.

Counsel for the appellant contended that the effect of the Tribunal's order in making part disallowance of depreciation amounted to enhancement of assessment for which Tribunal is not clothed with powers under the Income Tax Act. We are unable to accept this contention also because after holding that subsidy amount is not income, the Tribunal can consider whether assessment of part of it is possible through part disallowance of depreciation more so when Tribunal clearly found that subsidy itself was given to meet capital cost of machinery. Therefore, in principle we feel the Tribunal was within their powers to consider the question of disallowance for the purpose of depreciation after noticing that the assessment of subsidy amount as revenue/income is unsustainable. However, in this case since we have reversed the finding of the Tribunal with regard to the validity of the rectification proceedings there is no scope for considering any part disallowance for depreciation.

We therefore allow the appeal by holding that the rectification proceedings issued under Section 154 against the assessee and partly confirmed by the I.T Act is invalid. C.N.RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj