KITEX GARMENTS LIMITED,KIZHAKKAMBALAM vs. DCIT 1(1), CORPORATE CIRCLE, KOCHI

Being aggrieved, an appeal was filed before the CIT(A) contesting that the interest subsidy received under TUFS is capital Kitex Garments Ltd. receipt and capital subsidy received is not towards meeting the cost of any asset directly or indirectly. Hence the provisions of Explanation 10 of section 43(1) have no application. However, the CIT(A) rejected the above contentions by holding that the capital subsidy is capital receipt, the same is required to be reduced from the actual cost in terms of Explanation 10 to section 43(1) of the Act. As regards interest subsidy received, the CIT(A) held that interest subsidy of Rs. 12,05,749/- is a capital receipt.

Being aggrieved, the appellant is in appeal before us in the present appeal.

It is submitted that as provisions of Explanation 10 to section 43(1) have no application, inasmuch as, the lending agencies make disbursement towards project as a whole not for a specific machinery/equipment.

We have heard rival contentions and perused the material available on record. The issue that arises for our determination is whether the capital subsidy received by the appellant company in terms of TUFS of Ministry of Textiles, Government of India is required to be reduced from actual cost for the purpose of depreciation in terms of provisions of Explanation 10 to section 43(1) of the Act or not. No doubt the purpose of the scheme for which the subsidy is given is for upgradation of technology in the industries of textiles. The AO accepted the character of the receipt Kitex Garments Ltd. of subsidy as capital in nature. However, he is of the opinion that the subsidy so received should go to reduce the actual cost of the asset for the purpose of depreciation in terms of provisions of Explanation 10 to section 43(1) of the Act. The issue is no longer res integra as it is covered against the assessee by the decision of the Hon'ble Jurisdictional High Court in the case of Kinfra Export Promotion Industrial Parks Ltd. v. JCIT [2022] 137 taxmann.com 379 (Ker). Relevant portion of the judgement is extracted below: - “18. Assessee contends that the apportionment of the subsidy to building, furniture, plant & machinery, computer software etc. is illegal and contrary to the definition of the actual cost under Section 43(1) of the act r/w Explanation 10 r/w proviso. The assessee has discretion under ASIDE to utilise the grant on need-based development. So as evidenced by the utilisation certificate dated 03.01.2011, the assessee utilised the financial assistance for capacity enhancement of the water and power distribution facilities in the Industrial Park. The Assessing Officer for the assessment year 2008- 09 apportioned the subsidy of Rs.3,75,88,500/- against all the assets of the assessee. The proviso, even if is applicable under the scheme, the assessee has the discretion to spend the amount either acquire an asset or enhance the capacity of an asset. When it comes to the determination of actual cost, the adjustment shall be made only in respect to the asset against which the amount has been spent. The actual cost of the asset has arrived arbitrarily. The CIT(A) fell in serious error by reading the utilisation certificate dated 03.01.2011 for assuming that the Assessing Authority knows the asset wise investment made by the assessee. The assessment order is dated 15.12.2010. The utilisation certificate is subsequent to the assessment order. The basis for apportioning is not tenable both in law and fact. The Revenue argues that in the absence of details from the Kitex Garments Ltd. assessee about the acquisition of assets proportionate distribution of financial assistance against all the assets by the assessing authority is tenable.

We have perused the assessment order and the other confirmation orders of CIT(A) and the Tribunal. The Revenue is unable to controvert the stand of the assessee that in the exercise of the discretion given to the assessee on utilisation of funds, the assessee has enhanced the capacity of existing facilities viz. power, water distribution in the Industrial Park under its administration. For the purpose of Section 32 of the Act, the actual cost of assets alone will have to be determined, and in a broad spectrum, the subsidy is deducted even in respect of the assets which did not have value addition from or through the financial assistance received under ASIDE then the very purpose of depreciation of an asset is defeated/ undermined. The extent of details furnished in Annexure1 to the assessment order dated 15.12.2010, we are of the view that the apportionment of subsidy against the written down value of the assets as on 01.04.2007 on building, furniture and plant & machinery, computer software etc. suffer from patent illegality and what is due to the assessee while determining the actual cost of the asset is denied.

Therefore, the order of assessment is set aside to the extent that the subsidy is apportioned against all the assets viz. building, furniture and plant & machinery, computer software. The matter is remitted to the Assessing Officer for determination afresh. The assessee, since can place the actual cost after deducting the amount spent in the capacity building of the water and power distribution and files revised statements taking into consideration such revised statements, the assessment is completed. The question under consideration is answered in favour of the assessee and against the Revenue, as indicated above.”

In the result, appeal filed by the assessee stands dismissed.