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Income Tax Appellate Tribunal, VIRTUAL COURT
Before: SHRI M.BALAGANESH, AM & SHRI PAVAN KUMAR GADALE, JM &
आदेश / O R D E R PER M. BALAGANESH (A.M):
These appeals in 6361/Mum/2018 for A.Y.2013-14 & 2014-15 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal No.CIT(A)-9/Cir.4/08/2016-17 & CIT(A)-9/Cir.4/287/2016-17 dated 04/04/2016 & 14/08/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 23/03/2016 & 27/12/2016 by the ld. DCIT-4(3)(1), Mumbai (hereinafter referred to as ld. AO). Identical issues are involved in both these appeals and hence, both the appeals are taken up together and disposed off by this common order for the sake of convenience.
With the consent of both the parties, the appeal of the revenue for A.Y.2013-14 is taken as the lead case. The decision rendered for A.Y. 2013-14 would apply with equal force for A.Y.2014-15 also except with variance in figures.
The only effective issue to be decided in the appeal of the revenue is as to whether the ld. CIT(A) was justified in deleting the disallowance of depreciation on capital subsidy received by the assessee under Technology Upgradation Fund (TUF) scheme as per the Explanation 10 to Section 43(1) of the Act. Yet another issue is as to whether the ld. CIT(A) was justified in treating the interest subsidy received by the assessee under TUF scheme as a capital receipt.
We have heard rival submissions and perused the materials available on record. We find that assessee is a limited company engaged in manufacturing, trading and exporting of fabrics. The return of income for the A.Y.2013-14 was filed by the assessee on 21/09/2013 declaring total income of Rs.17,99,16,130/-. We find that the ld. AO on perusal of schedule-2 of the balance sheet under the head ‘reserves and surplus’ observed that assessee has shown capital reserve of Rs.3506.82 lakhs which included capital subsidy of Rs.4.54 lakhs received during the year. We find that this subsidy was given to the assessee for setting up of an industry and for making investment in capital intensive projects. The capital subsidy of Rs.4.54 lakhs was granted to the assessee under TUF scheme which was measured as a percentage of investment made in plant and machinery made by the assessee and the said subsidy is not directly or indirectly linked with any particular asset purchased by the assessee. Hence, it was pleaded by the assessee that the receipt of capital subsidy need not be credited to the value of plant and machinery in accordance with Explanation-10 to Section 43(1) of the Act which would have a consequential impact on the depreciation claimed by the assessee. Accordingly, the assessee submitted before the ld. AO that it was justified in crediting the receipt of capital subsidy of Rs.4.54 lakhs directly under the head ‘capital reserve’ in reserves and surplus in the balance sheet. We find that the ld. AO did not heed to this contention of the assessee and proceeded to reduce the capital subsidy of Rs.4.54 lakhs from the value of plant and machinery and correspondingly, reduced the claim of regular depreciation and additional depreciation claimed thereon in the assessment.
3.1. We find that the ld. CIT(A) had granted relief to the assessee by categorically holding that the said capital subsidy is not linked directly or indirectly with any particular asset purchased by the assessee and hence, the provisions of Explanation 10 to Section 43(1) of the Act would not be applicable in the facts of the instant case. We find that this finding has not been controverted by the revenue before us. We also find that the ld. CIT(A) had placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. P.J. Chemicals Ltd., reported in 210 ITR 830 in support of his contentions wherein it was held as under:-
“Government subsidy, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage-of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the "actual cost". 3.2. We find that the ld. CIT(A) had placed reliance on the Co-ordinate Bench decision of Visakhapatnam Tribunal in the case of Sasisri Extrusions Ltd. vs. ACIT reported in 122 ITD 428; Co-ordinate Bench decision of Patna Tribunal in the case of Dayal Steel Ltd., vs. Addl. CIT reported in 83 taxmann.com 221 and Co-ordinate Bench decision of this tribunal in the case of Spectrum Coal & Power Ltd., vs. ACIT in & Others. The ld. CIT(A) while granting relief to the assessee observed as under:-
“I understand from perusal of aforesaid decisions that the even after introduction of Explanation 10, there is no change in the basic concept and the test to be satisfied for reduction in actual cost is that a portion of the cost of asset should be met directly or indirectly by an authority either in the form of a subsidy or otherwise. So long as the subsidy is intended to encourage entrepreneurs to establish industries, the mere fact that a specified percentage of the fixed capital cost was taken as the base for determining the subsidy should not be mistaken as a payment intended to subsidise the cost of capital of the new industry. There is no material difference between language of Explanation 10 and language of section 43(1). Both define actual cost to be reduced by portion of the cost met directly or indirectly by any authority. Explanation 10 only clarifies what is stated in section 43(1). Emphasis is that the cost which is 'met directly or indirectly' has to be reduced from the cost of the asset. 3.3.7 In present case, the capital subsidy has been received under TUFS scheme. A perusal of the Resolution passed by the Ministry of Textiles in its Official Gazette dated 31.03.1999 shows that the objective of the TUF scheme was as under: "Given the significance of this industry to the overall health of the Indian economy, its employment potential and the huge historical backlog of technology upgradation, particularly in the context of the liberalization of the national industrial and trade policy and globalization of textile trade, it has been emphasized by experts that in order to sustain and improve its competitiveness and overall long term viability, it is essential for the textile industry to have access to timely and adequate capital at internationally comparable rates of interest in order to upgrade its technology level." It is therefore clear that the objective of TUFS scheme was not to meet a portion of cost of asset directly or indirectly, but to sustain and improve competitiveness and overall long term viability of textile industry. Hence, even though the amount of subsidy to be given might be determined by taking the cost of eligible investment as the basis, the incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost. 3.3.8 In view of above, the AO's action of reducing the TUFS subsidy from cost of plant & machinery is not sustainable, and therefore, the excess depreciation disallowed of Rs. 73,36,997/- is deleted. Therefore, the ground of appeal is allowed.”
3.3. None of the aforesaid observations made by the ld. CIT(A) in the first appellate order were controverted by the revenue before us both on facts, purpose test of giving subsidy and on law. We find that the Hon’ble Supreme Court had already categorically held that the purpose test would be the determining factor to decide whether a particular subsidy is capital or revenue in nature in the case of Ponni Sugars and Chemicals Ltd., reported in 306 ITR 392 (SC). Respectfully following the various decisions relied upon by the ld. CIT(A) and the decision of the Hon’ble Supreme Court in the case of Ponni Sugars referred to supra and in the facts and circumstances of the case, we do not find any infirmity in the order of the ld. CIT(A) deleting the disallowance of depreciation on capital subsidy and accepting the plea of the assessee that the said capital subsidy need to be directly credited only to capital reserve and not to be reduced from the value of plant and machinery as per Explanation-10 to Section 43(1) of the Act.
3.4. We find that assessee had also received interest subsidy under TUF scheme of Rs.56,54,913/- and interest subsidy of Rs.29,18,192/- from Government of Gujarat and Maharashtra. We find that this subsidy originally was offered as revenue receipt by the assessee in its return of income, which was sought to be treated as a capital receipt by the assessee by way of a separate letter dated 19/02/2016 during the course of assessment proceedings. There is absolutely no discussion made by the ld.AO in the entire assessment order regarding receipt of interest subsidy and its treatment being revenue are capital in nature and hence, before the ld.CIT(A), we find that by placing reliance on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Pruthvi Brokers and Shareholders reported in 349 ITR 336 (Bom), the assessee made a plea that the interest subsidy that was erroneously offered as revenue receipt by the assessee in the return of income should have to be treated as capital receipt as the said subsidy was also given for setting up new unit by the assessee. We find that this interest subsidy also was given to the assessee under the TUF scheme and the Government of Gujarat / Maharashtra for the purpose of setting up of new unit and the amount of subsidy alone was measured as the small percentage of the total interest paid by the assessee. Again by placing reliance on the decision of the Hon’ble Supreme Court in the case of Ponni Sugars referred to supra which held that the purpose of subsidy is to be seen than the measurement of said subsidy, we find that the ld. CIT(A) had categorically observed that the object of the TUF subsidy was to increase the competitiveness in the textile industry and not to increase the profits and hence the said interest subsidy deserves to be treated only as a capital receipt. Similarly, we have also observed that the interest subsidy given under the State Government scheme was also meant for promoting the industry in the area which also deserves to be treated only as a capital receipt. We find that the ld. CIT(A) had also placed reliance on the decisions of the Hon’ble Punjab and Haryana High Court in the case of CIT vs. Sham Lal Bansal reported in 200 Taxman 14 (P & H) and the Co- ordinate Bench decision of Kolkata Tribunal in the case of DCIT vs. Gloster Jute Mills Ltd., reported in 67 SOT 21 (Kolkata Tribunal) which was later approved by the Hon’ble Calcutta High Court in GA No.3980 and 3981 of 2014 dated 18/06/2018. We also find that the Hon’ble Rajasthan High Court in the case of PCIT vs. Nitin Spinners Ltd., in Income Tax Appeal No.31/2019 dated 19/09/2019 had under similar facts and circumstances held these receipt of subsidies to be capital receipts by placing reliance on the decision of the Hon’be Punjab and Haryana High Court, the Hon’ble Calcutta High Court and the Hon’ble Supreme Court in the case of Ponni Sugars referred to supra. In view of the aforesaid observations and going by the purpose of giving interest subsidy to the assessee in the facts and circumstances of the instant case and respectfully following the aforesaid judicial precedents, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee. Accordingly, the grounds raised by the revenue are dismissed for A.Y.2013-14.
3.5. At the cost of repetition, we would like to state that the decision rendered herein for A.Y.2013-14 would apply with equal force for A.Y.2014-15 also except with variance in figures.
In the result, both the appeals of revenue are dismissed.
Order pronounced on 10/09/2020 by way of proper mentioning in the notice board.