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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI S.S. GODARA & G.D. PADMAHSHALI
PER S.S. GODARA, JM :
These two Revenue’s appeals and 986/PUN/2018 with assessee’s cross objections Nos. 05 & 06/PUN/2022 therein, arise from the CIT(A)-7, Pune’s separate orders; both dated 16-03-2018 passed in case Nos.PN/CIT(A)-7/Cir-1/10411/2016-17 and No. PN/CIT(A)-7/Cir-1/10210/2017-18; assessment year wise, respectively in proceedings u/s.143(3) of the Income-tax Act, 1961, in short “the Act”.
Heard both the parties. Case files perused.
Coming to the Revenue’s first and foremost appeal for A.Y. 2013-14, we note that it raises the following substantive grounds :
“1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was erred in deleting the addition made on account of disallowance of depreciation as per the explanation 10 to sec.43(1) of the Act, without appreciating that the subsidy received is non- refundable and granted by the Central Government? 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in not applying the ratio laid down by the judgment of Hon’ble Karnataka High Court in the case of CIT Vs. Shree Renuka Sugar Ltd.(2012 ITL 248) dated 31/08/2012, to the present assessee? 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance made u/s.14A of the Act? 4. For these and such other grounds as may be urged at the time of hearing, the order of the learned CIT(Appeals) may be vacated and that of the Assessing Office be restored.”
3A. Suffice to say, the Revenue’s former twin substantive grounds in its latter appeal No.986/PUN/2018 are found to be consequential in light of its former substantive ground in A.Y. 2013-14. Since the issue herein is that of applicability of section of section 43(1) Explanation 10 wherein the Assessing Officer treated the Central Financial Assistance “CFA” of Rs.3,86,20,000/- received in A.Y. 2013-14 as a sum meeting cost of the assets thereby reducing the corresponding depreciation claims; respectively.
We stay back on this first and foremost substantive issue of applicability of section 43(1) Explanation 10 read with Proviso thereto.
The Revenue’s vehement stand in light of the Assessing Officer’s assessment findings dated 28-03-2016 is that the assessee had in fact met/received its cost of assets only which attracts the corresponding reduction under the impugned statutory provision. We note that the Revenue’s instant arguments hardly deserve to be accepted. A perusal of the corresponding sanction letter dated 30-09-2011 by Ministry of New and Renewal Energy, Govt. of India site [at page 10 in the assessment order] reveals that the said financial assistance in fact was meant to be realized to the assessee for the purpose of “off setting the loan amount in respect of the project and service charges to MEDA after its successful commission” only. The very factual position continues from a perusal of the assessee’s details at pages 39 to 42 wherein the department could not pinpoint any material that the foregoing Central Financial Assistance was meant to meet the cost of the assessee’s corresponding fixed assets. Faced with this situation, the department vehemently argued that the assessee has in fact met out the cost of fixed assets regarding the renewal energy plant as it has come on record that the loan account only had been credited by way of the subsidy in issue.
4.1. All these Revenue’s arguments fail to convince us as this tribunal’s coordinate bench’s order in Alkoplus Producers Pvt.Ltd. Vs. DCIT decision dated 04-04-2019 in ITA.No.1129/Pune/2011 has accepted the concerned assessee’s arguments dealing with the very issue as follows :
“8. Ground No.3 of the Revenue’s appeal is against deletion of addition of Rs.13,76,60,000/- on account of subsidy and ground no. 1 of the assessee’s appeal is against the direction of the ld. CIT(A) that the amount of subsidy should be reduced from the cost of assets in terms of Explanation 10 to section 43(1) of the Income-tax Act, 1961 (hereinafter also called ` the Act’).
9. Succinctly, the facts of these grounds are that the assessee received financial assistance granted by the Government of Maharashtra to eligible units under the Financial assistance to Grain Distillery Scheme, 2007. The AO has highlighted the important features of the scheme in the assessment order. It has been mentioned that the scheme was brought out to encourage investments in grain based distilleries in the backward regions of Maharashtra State. Such subsidy was paid to the assessee in the form of rebate of Rs.10/- per litre and Excise duty was repaid on the products supplied. The AO held that the subsidy was revenue in nature. The ld. CIT(A) overturned the assessment order on this point. He, however, held that the amount of subsidy should be reduced from the cost of assets in view of Explanation 10 to section 43(1) of the Act. Both the sides are in appeal on their respective stands.
We have heard both the sides and gone through the relevant material on record. It can be seen from the text of the scheme dated 08-07-200, relevant part of which has been reproduced in the assessment order that the main purpose of providing financial assistance under the scheme was : “to encourage investment in grain based distilleries in the backward regions of the Maharashtra State”. Once the object of the scheme is to encourage setting up of new units, the grant has to be held as a capital receipt. This is a settled legal position which follows from the judgment of the Hon’ble Supreme Court in CIT Vs. Ponni Sugar and Chemicals Ltd. (2008) 306 ITR 392 (SC) in which it has been categorically held that if subsidy is given, inter alia, for expansion, then it is a capital receipt irrespective of the fact that it is given in any form. Adverting to the facts of the instant case, we find that the subsidy was given to the assessee to establish the industrial unit in backward regions of the Maharashtra State. Even if such subsidy was quantifiable in the form of rebate of Rs.10/- per litre on the Excise duty, but the purpose of its grant, which is to accelerate the industrial development in grain based distilleries in the backward regions of the Maharashtra State, does not alter the nature of subsidy from capital to a revenue receipt. Considering the mandate of the scheme issued by the Government of Maharashatra, it becomes clear that the subsidy is a capital receipt not a revenue receipt. The impugned order is upheld to this extent.
11. At this stage, it is relevant to mention that the Hon’ble Supreme Court in CIT Vs. P.J. Chemicals (1994) 210 ITR 830 (SC) held that subsidy received in Central Scheme is a Capital receipt and the same should not be reduced from the cost of assets for depreciation. The legislature introduced Explanation 10 to section 43(1) with effect from the assessment year 1999-2000 providing that subsidy on assets acquired after this date should be reduced from the cost of asset. The ld. CIT(A) has taken cognizance of Explanation 10 in directing that the amount of subsidy should be reduced from the cost of asset. In our considered opinion, the view so adopted by the ld. CIT(A) is not in accordance with law in asmuchas this explanation gets activated where the subsidy is specifically relatable to cost of a particular asset. The language of Explanation 10 clearly states that : “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’. Proviso to this Explanation states 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’. On going through the language of the Explanation 10, it is manifest that it is attracted only when the object of the Scheme is to subsidize the cost of an asset and not otherwise. Proviso also refers to `such subsidy’ only. If the object of the Scheme is to accelerate the industrial development of the State, then the case is not caught within the mandate of the Explanation 10. Similar view has been taken by various benches of the tribunal in several decisions, including Sasisri Extractions Ltd. VS. ACIT (2010) 122 ITD 428 (Visakhapatnam). The Mumbai bench of the Tribunal in Godrej Agrovet Ltd. VS. ACIT in has also taken a similar view vide its order dated 17.9.2010. Though the Department preferred an appeal against this Tribunal order, but did not challenge the finding returned by the Tribunal on this aspect. Copy of the Tribunal order and the judgment of the Hon’ble Bombay High Court have been placed on record.
To deal with such a situation, the Finance Act, 2015, w.e.f. 1.4.2016, has enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under :-
`(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is 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;’
A bare reading of the above provision makes it explicit that now subsidy given by the Central Government or a State Government or any authority etc. for any purpose, except where it is taken into account for determination of the actual cost of the asset under Explanation 10 section 43(1), has become chargeable to tax. Even if a subsidy is given to attract industrial investment or expansion, which is a otherwise a capital receipt under the pre-amendment era, shall be treated as income chargeable to tax, except where it has been taken into account for determining the actual cost of assets in terms of Explanation 10 to section 43(1). This amendment is patently prospective. As the assessment year under consideration is 2011-12 and the amendment is effective from assessment year 2016-17, new hold that section 2(24) (xviii) will have no application. In view of the foregoing discussion, we are satisfied that the subsidy received by the assessee from the Government of Maharashtra is a capital receipt and accordingly not chargeable to tax and at the same time, it is not liable to be reduced from the cost of assets for the purposes of depreciation in the year under consideration. Thus, the ground raised by the Revenue is dismissed and that of the assessee is allowed.”
Mr. Murkund at this stage quoted the hon’ble Karnataka high court’s decision in Shree Ranka Sugar Ltd., (supra), is not found to be applicable in the facts of the instant case since the assessee concerned could not rebut the departmental stand that the subsidy scheme had actually reduced cost of its assets. We make it clear that our sole precise reason for rejecting the revenue’s instant former substantive ground in both these cases is its failure to prove that the subsidy herein was mean to reimburse the assessee’s cost of fixed assets for being subject matter of depreciation claimed so as to attract section 43(1) Explanation 10 of the Act. Yet another decision Sasisri Extraction Ltd., vs., ACIT [2008] 122 ITD 428 (Vizag) also hold that mere credit of the subsidy amount in the assessee’s loan account does not attract sec.43(1) Explanation 10 of the Act. The Revenue fails in its identical former twin substantive grounds in both these appeals therefore.
Next comes the Revenue’s identical substantive grievance in both these lower assessment years that the CIT(A) has erred in law and on facts in deleting section 14A r.w. Rule 8D disallowance of Rs.2,92,35,663/- and Rs.1,51,22,496; case wise, respectively .
We note at this stage that the assessee’s equally identical latter substantive ground in first sole ground in second cross objection Nos. 05 & 06/PUN/2022 also raises the very issue regarding the disallowance made by the AO u/s.14A r.w. Rule 8D(2)(ii) and (iii) involving the alleged interest and administrative expenses of Rs.2,59,65,555/- and Rs.32,70,108/- in former and Rs.1,26,31,912/- and Rs.24,90,584/- in latter assessment year; respectively.
Mr. Gujarathi invited our attention to the CIT(A)’s lower appellate discussion, more particularly in A.Y. 2013-14 in para Nos. 6.6 page 40 onwards, that the assessee had very well proved to have utilized its own interest bearing surplus funds for the purpose of making investments yielding exempt income. He also referred to the assessee’s paper book at page 60 containing the details of its reserves and surplus in A.Y. 2013-14. Mr. Gujarathi further submitted that the factual position is no different in A.Y. 2014-15 as well.
We have given our thoughtful consideration to vehement rival stands regarding the impugned issue of section 14A read with Rule 8D disallowance and are of the opinion that the former component of proportionate interest expenditure requires the Assessing Officer’s fresh adjudication on the specific issue as to whether the assessee’s non interest bearing surplus funds exceed the corresponding exempt income yielding investments or not in light of hon’ble jurisdictional high court’s judgment in HDFC Bank Ltd. Vs. DCIT 366 ITR 505 (Bom.) Ordered accordingly.
10. Learned counsel next submitted very fairly that so far as the latter limb of administrative expenditure in computing the impugned disallowance at the rate of 0.5% of the average value of investments is concerned, the same is indeed mandatory in nature which has to be computed qua exempt income yielding investments only. We appreciate the assessee’s fair stand and restore the extant instant limb of administrative expenditure disallowance as well back to the Assessing Officer for his fresh computation as per law in consequential proceedings. The Revenue’s instant identical second substantive ground in both these appeals as well as the assessee’s cross objections to this effect (supra) are accepted for statistical purposes.
The Revenue’s former appeal 984/PUN/2018 is partly accepted for statistical purposes in very terms. The assessee’s cross objection Nos. 05 & 06/PUN/2022 raising the foregoing issue(s) also follow the suit in very terms. Identical delay of 119 days in filing the cross objections is condoned in the larger interest of justice.
12. This leaves us with the Revenue’s third substantive grievance in seeking to revive section 36(1)(va) disallowance of Rs.19,42,513/- for the reason that the said employees contribution to Provident Fund ought to have been paid/credited before the due date specified not before the filing of return u/s.139 but under the corresponding specific statute(s). There would hardly any dispute that the hon’ble apex court’s recent landmark judgment in Checkmate Services P. Ltd. Vs. CIT-1 (2022) 448 ITR 1 (SC) has settled the law whilst deciding the very issue in departmental favour. Mr. Gujarathi at this stage submitted that the assessee had indeed paid the impugned contribution before the due date specified under the special laws as well.
Faced with this situation, and more so, when we have already restored the foregoing issue of section 14A read with Rule 8D disallowance back to the Assessing Officer, we observe that larger interest of justice would be served in case he further examines the instant section 36(1)(va) ground as well in accordance with law. Ordered accordingly. This Revenue’s latter appeal is partly accepted for statistical purposes.
13. No other ground or argument has been pressed before us.
To sum up, these Revenue’s twin appeals 984 and 986//PUN/2018 as well as assessee’s corresponding cross objection Nos.
05 & 06/PUN/2022 are partly accepted for statistical purposes in above terms. A copy of this common order be placed in the respective case files.
Order pronounced in the Open Court on 07th December, 2022.