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Facts
The assessee company received a capital subsidy from the Maharashtra Government under a Mega Projects scheme. The Assessing Officer treated this subsidy as revenue in nature and added it to the total income, which was upheld by the CIT(Appeals).
Held
The Tribunal held that the subsidy received by the assessee from the Government of Maharashtra under the Package Scheme of Incentives, 2007, is a Capital Receipt and not to be deducted from the actual cost of assets for depreciation calculation. The provisions of Explanation 10 to Section 43(1) of the Act were held to be not applicable.
Key Issues
Whether the subsidy received from the state government for setting up industries is a capital receipt or revenue receipt, and its impact on the actual cost of assets for depreciation.
Sections Cited
143(3), 143(2), 142(1), 2(24)(xviii), 43(1), 32
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Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee is directed against the order dated 26.11.2024 framed by National Faceless Appeal Centre, Delhi emanating out of Assessment Order dated 30.12.2017 passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
Assessee has raised following grounds of appeal :
“The following grounds of appeal are taken independently and without prejudice to one another.
1. The Ld. CIT(Appeals) has erred in dismissing the Ground No. (i) of the assessee in respect of the addition of ₹37,84,89,268 made by the Assessing Officer on account of the capital subsidy received from the Maharashtra Government under the Package Scheme of Incentives (2007), by treating it to be of revenue nature.
2. The Ld. CIT(Appeals) has erred in holding that the incentives of ₹37,84,89,268 received from the Maharashtra Government under the package of incentive Scheme 2007 claimed during the year are of revenue nature and the action of the Assessing Officer in bring these to tax is upheld. The CIT(Appeals) has failed to appreciate that, since the subsidy of ₹37,84,89,268 has been taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43, therefore by application of the explanation 10 to clause 1 of s. 43 of the Act, the amount of subsidy will not be treated as income u/s 2(24)(xviii) of the Act.
3. The appellant craves leave to add to or amend/modify or delete any or all of the above grounds of appeal.”
Brief facts of the case are that the assessee is a Private Limited Company engaged in the business of manufacturing and Job work of Automobile Goods. Loss of ₹30,26,69,877/- claimed in the return e-filed on 30.09.2015. Case processed u/s.143(1) of the Act. Subsequently, case selected for scrutiny through CASS followed by validly serving of statutory notices u/s.143(2) and 142(1) of the Act. So far as the issue raised in the instant appeal is concerned, ld. Assessing Officer during the course of assessment proceedings observed that the assessee has credited an amount of ₹37,84,89,268/- in profit and loss account towards Subsidy received/accrued under the Package Scheme of Incentive, 2007 of the Government of Maharashtra for Mega Projects vide Notification dated 30.03.2007. Ld. AO observed that in the computation of income assessee has claimed the said subsidy/incentive as Capital Receipt and reduced it from its Net Profit as per profit and loss account. The assessee during the course of assessment proceedings has pleaded that it is Capital Receipt and not liable to tax. However, ld. AO concluded the proceedings observing that the subsidy in question is not given to the assessee for establishment of business, i.e. it was not meant to be used prior to commencement or commercial business so as to make the same as Capital Receipt which is not in form of Fixed Asset but said sum has been given to the assessee after commencement of business. Ld. AO accordingly denied the claim of the assessee of treating the subsidy received as Capital Subsidy and added it back to the total income shown by the assessee and assessed income at ₹7,58,19,390.
Aggrieved assessee preferred appeal before ld.CIT(A) but failed to succeed as ld.CIT(A) observed that by no stretch of imagination can subsidies by way of refund of Sales Tax or Relief of Electricity Charges or Water Charges can be treated as an Aid to setting up of the industry of the assessee and since the subsidy so received by the assessee was towards waiver of Electricity Duty, Stamp duty, and MVAT/CST for period of eight years the same has been rightly assessed by ld. AO as Revenue Receipt.
Aggrieved assessee is now in appeal before this Tribunal.
Ld. Counsel for the assessee at the outset submitted that similar issue has come up before this Hon’ble Tribunal in assessee’s own case for past many years wherein it has been consistently held that the Subsidy in question received by the assessee from Government of Maharashtra under the Package Scheme of Incentive for Mega Projects is a Capital Receipt. Reference made to various decisions including that of this Tribunal in assessee’s own case in dated 27.04.2022 for A.Y. 2014-15.
On the other hand, ld. DR though supported the order of ld.CIT(A) but failed to controvert the contention that the issue raised in the instant appeal is squarely covered in favour of the assessee by the decision of this Hon’ble Tribunal.
We have heard the rival contentions and perused the record placed before us. We observe that the assessee has received Subsidy from the Government of Maharashtra under the Package Scheme of Incentives, 2007 at ₹37,84,89,268. We also note that assessee has credited the said Subsidy in its profit and loss account but while computing the income to file income-tax return the same has been reduced it from the Net Profit claiming it to be Capital Receipt not liable to tax. As submitted by ld. Counsel for the assessee that this issue has come up before this Tribunal in assessee’s own case on number of occasions, we take note of the decision of this Tribunal in dated 27.04.2022 for A.Y. 2014-15 (supra), wherein also subsidy of ₹36,08,69,697 was received and claimed as a Capital Receipt. For A.Y. 2014-15 Revenue was in appeal raising a ground that since there is direct link to the investment in Fixed Asset by the eligible unit therefore as per Explanation 10 to section 43(1) of the Act since the cost of asset has been met directly or indirectly by the Central Govt, State Govt. or any authority 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. We further find that this Tribunal has dismissed the Revenue’s appeal observing as follows :
“10. We heard the rival submissions and perused the material on record. We have carefully gone through the Package Scheme of Incentives, 2007, the preamble of the scheme, extracted above, clearly indicates the intention behind grant of subsidy was to encourage the setting up the new industries in under developed region in the State of Maharashtra. Indisputably, it is not the case of the Assessing Officer that the subsidy is revenue in nature, as the Assessing Officer himself had invoked the provisions of Explanation 10 to section 43(1) of the Act. Therefore, the issue that arises for our consideration in the present appeal is whether the amount of subsidy received from the Government of Maharashtra shall go to reduce the actual costs of assets u/s 43(1) for the purpose of allowing the depreciation u/s 32 of Act. No doubt, the subsidy was granted in terms of the certain percentage of fixed assets to be disbursed in the form of refund of octroi, electricity duty exemption, entry tax refund, VAT etc. over a period of 8 years. Then the next question, that arises for consideration in such circumstances is that, can be it said that subsidy is granted to meet the cost of the actual fixed assets, merely because the amount of subsidy is calculated in term of certain percentage of investment in fixed assets. The Hon’ble Supreme Court had an occasion to consider the identical issue in the case of CIT vs. P.J. Chemicals Ltd., 210 ITR 830 and after review of the case law on the point, the Hon’ble Supreme Court held as under :-
“Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the 'actual cost. The expression 'actual cost in section 43(1) of the Income-tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from 'actual cost'. The amount of subsidy is not to be deducted from the 'actual cost' under section 43(1) for the purpose of calculation of depreciation etc.”
The Hon’ble Gujarat High Court in the case of CIT vs. Swastik Sanitary Works Ltd., 286 ITR 544 (Guj.) following the principle laid down by the Hon’ble Supreme Court in the case of P.J. Chemicals Ltd. (supra) held that the subsidy is intended as an incentive to encourage entrepreneurs to move and establish industries,, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the “actual cost” as defined under the provisions of section 43(1) of the Act. Similarly, the Hon’ble Bombay High Court in the case of PCIT vs. Welspun Steel Ltd., 264 Taxman 252 followed the ratio of the decision of the Hon’ble Gujarat High Court (supra).
As regards to the applicability of Proviso to Explanation 10 to section 43(1) which was inserted in the Statute w.e.f. 1.4.1999 by the Finance Bill (2) of 1998, the Proviso take cares of situation where such subsidy, grant or reimbursement is such nature that subsidy, grant or reimbursement cannot be directly relatable to the assets acquired by an assessee. In such a situation, the Proviso envisages that so much of amount which bears to the total subsidy, reimbursement or grant, the proportion as such assets bears to all the assets in respect of or with reference to which subsidy or grant is so received shall be deducted in the actual cost of the asset of the assessee. Thus, the proviso envisages adjustment of subsidy in the assets of the assessee. In case the subsidy grant is not directly relatable to particular asset. Since in the preceding paras we held that the provisions of Explanation 10 to section 43(1) have no application to the facts of the present case, the question of applicability of Proviso does not arise. In the light of the above, we hold that the amount of subsidy is not to be deducted from the actual cost u/s 43(1) for the purpose of calculation of depreciation and the provisions to Explanation 10 to section 43(1) have no application to the facts of the present case. We are forfeited in taking this view by the decision of the Hon’ble Bombay High Court in the case of Welspun Steel Ltd. cited supra. This decision being that of Jurisdictional High Court is binding on us. Therefore, it is not necessary for us to deal with the decision of the Hon’ble Delhi High Court in the case of Steel Authority of India Ltd. (supra) and the Hon’ble Karnataka High Court in the case of Shree Renuka Sugars Ltd. (supra) relied upon by the ld. CIT-DR. Therefore, we do not find any merit in the ground of appeal no.2 and 3 filed by the Revenue. Accordingly, ground of appeal no.2 and 3 stands dismissed.”
From perusal of the above finding of this Tribunal, we find that the same is squarely applicable on the facts of the instant case and this Tribunal has held that since the provisions of Explanation 10 to section 43(1) have no application to the case of the assessee, the question of applicability of proviso to Explanation 10 to section 43(1) of the Act does not arise. In other words, the Tribunal has held that since the alleged subsidy received by the assessee is not relatable to any Fixed Asset, therefore, Explanation 10 to section 43(1) will not apply. Further, the Tribunal taking consistent view has held that the subsidy received by the assessee from the Government of Maharashtra under the Package Scheme of Incentives, 2007 is a Capital Receipt.
Finding of ld.CIT(A) is reversed. Grounds of appeal raised by the assessee are allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 10th day of December, 2025.