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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI INTURI RAMA RAO & SHRI S. S. VISWANETHRA RAVI
ORDER
PER INTURI RAMA RAO, AM:
This is an appeal filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)- 4, Pune [‘CIT(A)’ for short] dated 03.07.2017 for the assessment year 2014-15.
The Revenue raised the following revised grounds of appeal :- “
1. The CIT (A) erred both on facts and in law in passing the order.
2. The CIT (A) erred in holding that there was no provision in package scheme of incentives, 2007 to show that the asseessee is granted subsidy towards meeting a cost of asset and CIT(A) has erred in not accepting the facts that there is a link between subsidy given and the cost of investment.
3. The CIT (A) erred in holding that there is no “direct” link to the investment in fixed assets by the eligible unit. As per explanation 10 to sec 43 (1) of the I.T. Act, 1961 when cost of asset has been met directly or indirectly by the Central Government, the State Government or any authority then such subsidy shall not be included in the actual cost of asset.
4. The CIT (A) ought to have considered that impugned incentives are taxable as per Scheme (Para 3.4), the subsidy/incentive is available after commencement of commercial production, as the same is in the nature of interest subsidy, electricity duty exemption, royalty refund, octroi, entry tax refund etc.
5. For these and such other reasons as may be urged at the time of hearing, the order of the CIT(A) may be vacated and that of the Assessing Officer be restored.
6. The appellant craves, leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon’ble Tribunal.”
3. The brief facts of the case are that the respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing of automobile goods and job works. The return of income for the assessment year 2014-15 was filed on 30.11.2014 declaring loss of Rs.16,07,49,235/-. Against the said return of income, the assessment was completed by the Income Tax Officer, Ward- 6(1), Pune (‘the Assessing Officer’) vide order dated 16.12.2016 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total loss of Rs.8,34,02,137/-. While doing so, the Assessing Officer had reduced a sum of Rs.36,08,69,697/- being the amount of capital subsidy received from Government of Maharashtra under the Package Scheme of Incentive, 2007 from the cost of the depreciable Explanation 10 to section 43(1) of the Act. The brief facts of the said issue are as under : The Government of Maharashtra in order to encourage the dispersal of industries to the less developed areas of the State announced the package to New/Expansion Units set up in the developing region of the State since 1964 under a scheme known as the Package Scheme of Incentive. This Package Scheme of Incentive was introduced in the year 1964 and was amended from time to time with latest amendment in the year 2001 and is operative from 01st April 2001 to 31st March, 2017. The incentive is calculated 75% of the cost of investments to be disbursed in the form of 40% eligible investments over a period of 8 years of refund of octroi, electricity duty exemption, entry tax refund, VAT etc. The preamble of the said Scheme reads as under :- “PREAMBLE In order to encourage the dispersal of industries to the less developed areas of the State, Government has been giving a Package of Incentives to New / Expansion Units set up in the developing region of the State since 1964 under a Scheme popularly known as the Package Scheme of Incentives. The Package Scheme of Incentives, introduced in 1964, was amended from time to time. The last amended Scheme, commonly known as the 2001 Scheme is operative from the 1st April, 2001 to 31st March, 2007. The State has declared the new Industrial, Investment, Infrastructure Policy 2006 to ensure sustained industrial growth through innovative initiatives for development of key potential sectors and further improving the conducive industrial climate in the State, for providing the global competitive edge to the State’s industry. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced Regional Development and Employment Generation through Greater Private and Public Investment in industrial development. The Package Scheme of Incentives 2007 outlines the eligibility criteria, quantum of incentives and monitoring mechanism for administering the incentives.”
The Assessing Officer was of the opinion that the subsidy of Rs.36,08,69,967/- received from the Government of Maharashtra is only to meet the cost of the fixed assets relying on the eligibility certificate dated 22.03.2012 and, therefore, Assessing Officer is of opinion that the amount of the subsidy should be reduced from the cost of depreciable assets in terms of the provisions of Explanation 10 to section 43(1) of the Act and Proviso thereto placing reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Shree Renuka Sugars Ltd., 28 taxmann.com 268 (Kar.) and the decision of the ITAT, Hyderabad Bench-A in the case of Exaband (India) (P) Ltd. vs. ACIT.
Being aggrieved by the order of assessment, an appeal was filed before the ld. CIT(A), who vide impugned order held that merely because the quantum of subsidy is granted in term of certain percentage of total investments made by the appellant in the fixed assets, it does not mean that the subsidy is granted to meet the cost of any units. Accordingly, the ld. CIT(A) directed the Assessing Officer not to reduce the subsidy from the cost of assets for the purpose of depreciation allowable under the provisions of section 32 of the Act.
Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us.
Ground of appeal
no.1 is general in nature dismissed as such.
8. Ground of appeal no.2 and 3 challenges the findings of the ld. CIT(A) that the subsidy was not granted to meet the cost of the assets, consequently the provisions of Explanation 10 to section 43(1) has no application. The ld. CIT-DR taking us through the claim of subsidy submits that the subsidy was granted as a certain percentage of 75% of the investments in the fixed assets and disbursed in the form of refund of octroi, electricity duty exemption, entry tax refund, VAT etc. over a period of 8 years. Therefore, it is submitted that the subsidy is granted only to meet the cost of the fixed assets and the provisions of Explanation 10 to section 43(1) have direct application to the facts of the present case. He also placed reliance on the decision of the Hon’ble Delhi High Court in the case of Steel Authority of India Ltd. vs. CIT, 348 ITR 150 (Delhi) and also the decision of the Hon’ble Karnataka High Court in the case of Shree Renuka Sugars Ltd. (supra).
9. On the other hand, ld. AR for the respondent-assessee submits that though the amount of subsidy was calculated in terms of certain percentage of the investments in fixed assets, it does not mean that the subsidy was granted to meet the cost of the fixed assets and, Explanation 10 to section 43(1) have no application.
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 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