DCIT, NEW DELHI vs. M/S. ABHISAR BUILDWELL (P) LTD., DELHI

Date of hearing 05.08.2019 Date of pronouncement 09.08.2019 ORDER PER O.P. KANT, A.M.:

These appeals have been preferred by Revenue, against the consolidated order dated 15/07/2016 passed by the Ld. Commissioner of Income-tax (Appeals)-30, New Delhi [in short ‘the Ld. CIT(A)’]for assessment years 2012-13 and 2013-14, involving a common issue in dispute in same set of circumstances and therefore, these appeals were heard together and dispose off by way of this consolidated order for the sake of convenience.

2 & 5130/Del/2016 1. On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete addition of Rs. 5,58,42,712/- made on account of disallowance of depreciation u/s 32(1) r.w.s.43(l) of the Act.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by holding that excise refund being revenue receipt cannot be reduced from the cost of plant & machinery.

5. That the grounds of appeal

are without prejudice to each other.

6. The appellant craves leave to add, alter or amend any/ all of the grounds of appeal before or during the course of the hearing of the appeal.

3. Briefly stated facts of the case are that the assessee company was created by way of demerger of units of M/s Dharmpal Satyapal Ltd. For assessment year 2012-13, the assessee filed return of income on 29/09/2012 declaring loss of Rs.12,70,68,682/-. For assessment year 2013-14, the assessee filed return of income on 30/09/2013, declaring loss of Rs.2,39,31,771-. The case of the assessee for both assessment years were selected for scrutiny and assessment under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) were completed. The Assessing Officer noticed that the assets of the demerged units included asset acquired out of Excise duty exemption (accounted as deferred government grants in the books of accounts) as per scheme of investment. According to the Assessing Officer said excise duty refunds should have been 3 & 5130/Del/2016 reduced from the actual cost of the asset in terms of section 43(1) of the Act. The Assessing Officer accordingly, reduced the cost of the asset and disallowed excess depreciation in assessment year 2012-13 of Rs.5,58,42,712- and in assessment year 2013-14 of Rs.4,80,25,953/-. On further appeal, the Ld. CIT(A) deleted the disallowance in consolidated order for both assessment years observing as under:

“4.4 I have carefully considered assessment order, written submissions, case laws relied upon and oral arguments of AR. The objections/ arguments of the appellant are discussed as under:- (i) Briefly stated the facts of the case, are that the ‘Rubber Thread Unit’ and ‘Flexible Packaging Unit’ of existing Company M/s Dharampal Satyapal Ltd. got demerged w.e.f. 01.4.2006, vide order of Hon’ble Delhi High Court dated 11.9.2007 and the resultant companies were named as M/s Abhisar Buildwell Pvt. Ltd. and M/s Avichal Buildcon Pvt. Ltd. As per observations made by the Special Auditor, appointed in the case of M/s Dharampal Satyapal Ltd., the assets of the demerged Units, included assets acquired out of amount of Excise Duty Exemption (accounted as Deferred Govt. Grant in the books of the demerged company). The year wise amount spent in the case of the assessee company is given as under: (in Rs) Particulars Up to 31.3.2010 F.Y.2010-11 Upto 31.3.2011 - Plant & Machinery 59,74,32,116 59,74,32,116 Civil Works 18,57,80,476 - 18,57,80,476 Total 78,32,12,592 - 78,32,12,592 As per the scheme of demerger, all the assets and liabilities, have been vested in the resultant/ assessee Company. Further, all the incentives, subsidies and other benefits enjoyed like excise duty, income tax concession and exemptions, incentives granted by Central and State Govts., local authority or by another person, whether availed/ available to the erstwhile unit of M/s Dharampal Satyapal Ltd., shall vest with and be available to the wholly owned subsidiary resultant/ assessee company, on same terms and conditions. (ii) Based on the aforesaid observations of the Special Auditor, and in the light of provision of Section 43(1), Explanation 7A, A.O. was of 4 & 5130/Del/2016 the opinion that the actual cost of capital asset transferred to the appellant company, shall be taken to be same, as it would have been, if the demerged company had continued to hold the capital asset for the purpose of its own business. (iii) In the assessment order, A.O. has observed that the ‘actual cost’, as defined in Section 43(1) of the Act, has been stated to be ‘actual cost means the actual cost of assets to the assessee as reduced by that portion of the cost thereof, as has been met directly or indirectly by any other person or authority’. In the assessment proceedings, the assessee submitted that the refund of excise duty paid on the manufacturing activities, carried out in the notified area, is to promote the industries in such area. However, A.O. was of the views that excise duty refund, has been invested in assets in the notified area and therefore, as per Explanation 7 A and 10 of Section 43(1) the Act, such refund of excise duty, has to be reduced from the cost of assets, on which depreciation has been claimed. (iv) In the assessment proceedings, it was submitted by the assessee, that no cost of assets has been met out from the refund of excise duty by the existing assessee company after demerger. However, the above submissions of the assessee did not find favour with the A.O. and therefore, A.O. in the assessment order reduced the excise duty refund from the block of assets, as was done in A.Y.2007-08 to A.Y. 2011-12. Accordingly, the A.O. determined the depreciation on net WDV, which becomes NIL, as in the opinion of the A.O., all the assets falling in block of assets, have been purchased out of Excise duty refund, which resulted in NIL depreciation. Accordingly, A.O. observed that the cost of the assets met out of the deferred Govt, grants as on 31.3.2011, is Rs.78,32,12,592/- and no further investment has been made out of deferred govt, grants in block of assets. The A.O has recomputed the claim of depreciation u/s 32(1) of the Act, by reducing the actual cost of assets by a sum of Rs.78,32,12,592/- and the excess claim of depreciation made by the appellant company to the tune of Rs.5,58,42,712/-, has been disallowed. (v) In the appellate proceedings, the appellant has reiterated the arguments submitted in the assessment proceedings and has also submitted that the excise duty refund is a revenue receipt, which has been credited to the P & L Account. The nature of the excise duty refund received is like a benefit of cash assistance, arising from business and therefore, same will form part of profits and gains from business. Accordingly, it is submitted by the AR that in view of the fact that the excise duty refund is a revenue receipt and therefore, same cannot be further reduced from the block of assets, for determining depreciation on the reduced WDV. For the above view, the AR has also relied upon the judgment of the Apex Court in the case of Commissioner of Income 5 & 5130/Del/2016 Tax vs. Meghalaya Steels Ltd. [2016] 383 ITR 217, wherein it has been held that the subsidy forming part of P&L Account, being revenue in nature, has to be treated as derived from business or an industrial undertaking and will form part of business income, on which deduction u/s 80IB/ 80IC, is allowable. (vi) The appellant has further submitted that the grant of excise duty exemption, was accorded as per the scheme of Central Govt, vide notifications issued in this regard (Notification No. 8/2004 of Central Excise dated 02.01.2004) to the existing unit and the exemption of excise duty so granted, was to be utilized in the development of the state by setting up or by making investment in another unit in the same state or other notified state. The quantum of such excise duty collected, but not deposited with Govt., has been the part of revenue receipts duly credited in the P & L Account on year to year basis, on the sales affected by the entrepreneurs. Therefore, it is further submitted that the Special Auditor failed to appreciate the scheme of excise duty exemption notified by the Central Govt, and wrongly observed that investment in Plant & Machinery, was made out of the Govt, grant by the erstwhile company M/s Dharampal Satyapal Ltd. As per notification of the Central Govt., such excise duty payable, but is exempt in this notification, and same shall be utilized by the manufacturer, only for investment in: � P & M in a manufacturing unit located in the concerned states, and/ or � Infrastructure or civil works or social projects in such states. Therefore, the utilization of excise duty refunds, were meant not only for P&M, but also for infrastructure or social projects, not meant for reduction thereof from the cost of investments made in Plant & Machinery. At best, it can be said that such refunds were meant for promotional activities by setting up new units in the area notified itself. It is further submitted by the AR that the excise duty refund is not in the form of capital subsidy, but is a revenue receipt forming part of taxable income. Therefore, such kind of subsidy cannot be reduced from the block of asset to determine the actual cost of assets in the hands of the assessee. (vii) In the earlier A.Y. 2007-08 to A.Y. 2011-12, the submission were made before the A.O. as well as in appellate proceedings, before Ld. CIT(A) that the scheme of demerger was approved by the Hon’ble High Court, and therefore, it amounts to approval of the cost of acquisition of assets in the hand of the resulting companies, after demerger. Therefore, the claim of depreciation has been correctly made on such cost of assets transferred to the resulting companies and there is no scope for making any disallowance against claim of depreciation made on such acquired value of assets, without reducing the Excise duty refund. However, the excise duty refund, was always credited to the P & L Account and therefore, it was 6 & 5130/Del/2016 always treated as revenue receipt in the books of account from A.Y. 2007-08 onwards. However, the appellant did not make submission before the A.O. as well as before Ld. CIT(A), regarding nature of excise duty refund. However, the submissions now made on account of nature of excise duty refund and decision of Apex court in the case of Commissioner of Income Tax Vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC), was not available earlier. Therefore, it is submitted that now the ratio led down by the Hon'ble Supreme Court, is equally applicable to the facts of the appellant, since the excise duty refund is a revenue receipt, forming part of profits and gains, arising from business. Therefore, as per AR, this excise duty refund has already suffered tax. On identical facts, as to whether excise duty refunds are revenue receipt or capital receipt, the jurisdictional High Court in the case of CIT vs. Dharampal Premchand Ltd [2009] 317 ITR 353-Delhi H.C] has held that ‘the excise refunds received by the Units are eligible for deduction u/s 80IB of the Act and such deduction is inclusive of excise benefits received by the Units’. The SLP preferred by revenue against this judgment to the Hon’ble Supreme Court, was dismissed, on the ground that refund of excise duty should not be excluded in arriving at profit derived from business for the purpose of claiming deduction u/s 80IB of the Act, as has been correctly held by the jurisdictional High Court. Therefore, the excise duty refund cannot be treated as capital receipt, in order to reduce the same from the cost of investment made in Plant & Machinery, as per section 43(1) of the Act. The AR has further submitted that the Hon'ble Supreme Court, in the above referred case of Commissioner of Income Tax Vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC), has also approved the decision of jurisdictional High Court in the case of CIT vs. Dharampal Premchand Ltd [2009] 317 ITR 353-Delhi H.C]. (viii) It has been further submitted by the AR that from the ratio of the aforesaid judgments, it is quite clear that, excise duty refund had direct nexus with the profits and gains of the business of the existing company before demerger, such excise duty refund constituted revenue receipts in the hand of the existing company. Consequently, such revenue receipts in the nature of excise duty refund, cannot again be reduced from ‘Actual Cost’ of assets within the meaning of Section 43(1) of the Act, because such receipts are not grant or subsidy meant for deduction, as has been envisaged in Explanation 10 of section 43(1) of the Act. The observation of the special auditor that the said assets were acquired by the de-merged company M/s Dharampal Satyapal Ltd., out of the amount of excise duty refund, accounted as deferred government grants in its books of accounts, does not carry any force to make reduction in the cost of assets.

7 & 5130/Del/2016 The appellant has also relied upon a recent judgment of Hon’ble Gujarat High Court in the case of Alpha Lab vs. ITO reported in [(2016)(6) TMI 560,Gujarat H.C] dated 07.6.2016, wherein it has been clearly held that subsidy received against investment made in a backward area, where industrial development activities have been undertaken, is by way of promotion of such activities and that will not reduce the value of the assets, even where the amount of subsidy received was transferred to the capital account of the partners, and it was held that the cost of assets could not be reduced by the amount of subsidy while working out the depreciation allowance. From the above, following facts emerged: � The excise duty refund is given to the appellant on account of the manufacturing activities carried out in the notified area, upon fulfillment of certain conditions; and � The Excise duty refund, is derived from the manufacturing activities and purchasing the assets from this excise duty refund on fulfillment of certain conditions, is nothing, but application of profits, � The excise duty refund is of the nature of revenue receipt, forming part of Profits and Gains, arising from business. The same is a revenue receipt, as has been held by Hon'ble Supreme Court, in the case of Commissioner of Income Tax Vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC) and therefore, this excise refund, being a revenue receipt, cannot be reduced from the cost of Plant & Machinery. From the above, it is clear that the Excise duty refund, is a revenue receipt, forming part of total taxable income and therefore, same cannot be reduced from the block of assets, in order to determine the actual cost of assets. In view of the above facts and circumstances, I am of the considered opinion that Excise duty refund, is not in the form of capital subsidy or grant, which can be reduced from the cost of assets. Therefore, I agree with the argument of the appellant and in facts and circumstances as discussed above, with due respect, I differ from the findings of Ld.CIT(A) in the earlier Assessment years on the same issue and also, in view of the ratio laid down by Flon'ble Supreme Court, in the above referred case. Accordingly, findings of the A.O. are erroneous and therefore, disallowance of Rs.5,58,42,712/-, is deleted. Accordingly, all the grounds, are hereby allowed for A.Y. 2012-13 & A.Y. 2013-14.”

3.1 Aggrieved, the Revenue is in appeal before the Tribunal.

8 & 5130/Del/2016 4. At the outset, before us, the Ld. counsel of the assessee submitted that issue in dispute is covered by the order of the Tribunal in ITA No. 4990/del/2014 for assessment year 2010-11, and ITA No. 823/Del/2015 for assessment year 2011-12.

“9.We have considered the submissions of both the parties and perused the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the assessee’s appeal in for the assessment year 2011-12 wherein vide order dated 17.09.2018, the relevant findings have been given in paras 6 to 14 which read as under: “6. Undisputedly, flexible packaging unit of M/s. Dharampal Satyapal Ltd. was demerged into the assessee company. The Id. AR for the assessee contended that no portion of cost of asset acquired by the assessee company was met out of the grant or subsidy or reimbursement of the Government or any other person rather cost of the assets in the hands of assessee company are as per demerger scheme approved and as such, there is no question of reducing the cost of asset and depreciation.

8. Ld. AR for the assessee by relying upon CBDT Circular No. 37/2016 dated 02.11.2016 contended that benefit of deduction u/s 80IC is admissible on profits enhanced by disallowance made u/s 32 of the Act which makes the claim of depreciation 9 & 5130/Del/2016 as revenue neutral and further contended that the assessee is entitled to claim benefit of statutory deductions u/s 80IC on additional income arising from disallowance of claim of depreciation.

10 & 5130/Del/2016 4.Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn / not pressed upon. The above may be brought to the notice of all concerned. ”

14. Since findings returned by the Id. CIT (A) are based upon the decision rendered by Hon’ble Apex Court in CIT vs. Meghalaya Steels Ltd. - (2016) 383 1TR 217 (SC), we are of the considered view that the excise refund is in the nature of revenue receipt forming part of profits and gains arising from the business and as such cannot be reduced from the cost of plant & machinery. So, the findings returned by Id. CIT (A) on this issue are confirmed. 14.In view of what has been discussed above, we are of the considered view that AO as well as CIT (A) have erred in making addition of Rs. 6,40,38,391/- by disallowing the claim of depreciation of the asset made u/s 32 of the Act which would further entitle to the assessee the benefit of deduction u/s 80IC on profits enhanced by such disallowances made u/s 32 of the Act. Consequently, appeal filed by the assessee is partly'' allowed. ” So, respectfully following the aforesaid referred to order dated 17.09.2018 in assessee’s own case, the issue under consideration is decided in assessee’s favour.”

7. We find that in assessment year 2011-12, in in the case of the assessee itself, the excise refund has been held as revenue receipt and disallowance made on account of depreciation has been deleted observing as under:

“13. So far as question of treating the refund of excise duty as part of the cost is concerned, it is the case of the assessee that the entire cost has been paid by the assessee for plant & machinery and as such, it cannot be reduced from the cost of asset. Ld. AR for the assessee relied upon order passed by CIT (A) dated 15.07.2016 in assessee’s own case for AYs 2012-13 & 2013-14 wherein excise duty refund has not been treated in the form of capital subsidy or grant which can be reduced from the cost of assets.

14. In view of what has been discussed above, we are of the considered view that AO as well as CIT (A) have erred in making addition of Rs.6,40,38,391/- by disallowing the claim of depreciation of the asset made u/s 32 of the Act which would further entitle to the assessee the benefit of deduction u/s 80IC on profits enhanced by such disallowances made u/s 32 of the Act. Consequently, appeal filed by the assessee is partly allowed.”