FLENDER LTD,MUMBAI vs. ADDL CIT RG 2, MUMBAI

Date of hearing 21-06-2018 Date of pronouncement 29-06-2018 O R D E R

Per G Manjunatha, AM :

The assessee has raised the following grounds of appeal:-

“1. On the facts and circumstances of the case and in law, the Learned Commissioner of Income tax (Appeals) ['CIT(A)'] erred in upholding the disallowance of stock written-off aggregating to Rs. 58,62,102. 2. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in upholding that the capital subsidy of Rs. 86,64,458 received from the Government of Bengal ought to be adjusted against additions made during the year in the relevant block of assets instead of opening WDV.

2 ITA 1246/Mum/2017

4. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in upholding the reduction made to the depreciation claim by Rs. 6,70,013 arising due to adjustment of capital subsidy received from the government against the additions made during the year instead of opening WDV.” 2. The brief facts of the case are that the assessee company is engaged in the business of manufacture of gear boxes coupling and standard accessories, filed its return of income for AY 2006-07 on 08-11- 2006 declaring total income at Rs.20,76,50,964. The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act, alongwith detailed questionnaire were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called for. The assessment has been completed u/s 143(3) on 31-12-2009 determining the total income at Rs.22,94,16,980 by making various additions including addition towards disallowance of stock written off aggregating to Rs.58,62,102 and re- working depreciation claim on plant & machinery after adjusting capital subsidy received from Government of West Bengal of Rs.86,64,458.

3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions on the issue of disallowance of stock written off which has been reproduced by the Ld.CIT(A) at para 2 on pages 4 & 5 of his order. The assessee also filed elaborate submissions on the issue

3 ITA 1246/Mum/2017 of wrong claim of depreciation and treatment of capital subsidy amounting to Rs.31,63,319 as revenue receipt which has been reproduced by the Ld.CIT(A) on page 6 of his order. Insofar as addition towards disallowance of stock written off, the sum and substance of the argument of the assessee before the Ld.CIT(A) are that the assessee has written off obsolete and non usable raw material; however, the AO has on mistaken facts, wrongly noted that the stocks written off are items of plant & machinery in the nature of capital expenditure cannot be allowed as deduction. Insofar as adjustment of capital subsidy revived from Government of West Bengal and treatment of an amount of Rs.31,63,319 as revenue receipt, the assessee submitted that it has deducted capital subsidy received towards plant and machinery from the opening WDV, whereas the AO has set off against addition to plant & machinery made during the year to re-work depreciation without understanding the fact that capital subsidy received from Government of West Bengal pertains to amount invested in the project which needs to be reduced from the WDV of the block of assets. Similarly, in respect of treatment of surplus subsidy received on account of residential building, the assessee submitted that at no stretch of imagination, capital subsidy received from Government of West Bengal can be treated as revenue receipts as the assessee has received capital subsidy @15% of total

4 ITA 1246/Mum/2017 investments which has to be rightly adjusted against block of assets.

“5.1 The detailed submission of the appellant is reproduced above. It is noted that the appellant is in the business of manufacturing of gear box, coupling and standard accessories. During the course of assessment proceedings itself, it was categorically that these bevel sets are used for production process for gear box and due to "higher friction loss and lower surface finish and accuracy such items are no longer he submission makes it very clear that these items are part of production process or manufacturing as these have lost the surface finish after prolonged use. As regards the fresh submission that these are part of stock in trade no supporting evidence is produced in the form of stock register etc either before A.O or during appellate proceeding. Further, if these are part of stock in trade, then there is no corresponding scrap value is shown as substantial amount of Rs 5,8,62,102/- has been written off. Looking into the facts of the case, in my opinion the AO has correctly taken action on the basis of submission made and facts of the case.”

As regards capital subsidy received from Government of West Bengal under industrial development Incentive Scheme, 2000 for expansion programme of Kharagpur factory of the assessee, the CIT(A) observed that the entire subsidy has been received for this year, therefore, to say

5 ITA 1246/Mum/2017 that such subsidy is in respect of earlier years is without any supporting evidences and hence cannot be accepted. Further, in that case, the matching of the subsidy of the items in the respective year needs to be done which is also not done. Under these facts, he opined that the subsidy has to be reduced from the addition made during this year and not from the opening WDV. Similarly, the balance amount of Rs.33,79,139 has been reduced by the assessee from opening WDV of the non residential building while the AO has reduced Rs.2,15,870 to the extent of addition to the non residential building in this year and the balance amount of Rs.31,63,319 is worked out as revenue receipt for the reason that subsidy received in excess of investment in fixed asset is revenue in nature, therefore, opined that there is no error in the order of the AO in treating excess subsidy received as revenue receipt. The relevant portion of the order of the Ld.CIT(A) is extracted below:-

“8. As regards ground No. 5, the facts are that the appellant has received capital subsidy of Rs 86,64,458/- from West Bengal Industrial Development Corporation under its Incentive Scheme 2000 for expansion programme of Kharagpur factory of the company. The entire capital subsidy is received in this year. Therefore the AO has reduced the capital subsidy amounting to Rs 52,85,320/- which was used for addition to plant and machinery from the additions of plant and machinery in this year. The appellant however has reduced this amount from the opening WDV of plant and machinery in this year on the premise that the amount has been received in respect of earlier years. Similarly the balance of Rs 33,79,139/- has been reduced by the appellant from opening WDV of the non residential building while the AO has reduced Rs 2,15,820/- to the extent of addition to the non residential building in this year and the balance amount of Rs 31,63,319/- is worked out as revenue receipt. 8.1 The detailed submission of the appellant is reproduced above. As discussed above, the entire subsidy has been received in this year. Therefore to say that such subsidy is in respect of earlier years without any supporting evidence is not acceptable.”

No doubt, stocks written off in respect of raw materials is chargeable to 7 ITA 1246/Mum/2017 P&L account, but it is the duty of the assessee to prove beyond doubt before the authorities that such write off is raw materials, which are used in the production process of final products. Since the assessee has failed to produce any kind of evidence before the lower authorities, we deem it appropriate to set aside the issue to the file of the AO to consider afresh the issue in the light of claim of the assessee that stock written off pertains to raw materials. The assessee is directed to furnish necessary evidence before the AO. If the AO found that the stock written off pertains to raw material, then the AO is directed to allow stock written off Rs.58,62,102.

8. The next issue that came up for our consideration is adjustment of capital subsidy received from Government of West Bengal and re- calculation of depreciation and also treatment of excess capital subsidy received as revenue receipt of Rs.31,63,319. The Ld.AR for the assessee submitted that the assessee has received capital subsidy of Rs.86,64,459 from West Bengal Industrial Development Corporation under West Bengal Incentive Scheme, 2000 and out of which an amount of Rs.52,85,320 pertains to plant & machinery and balance amount of Rs.33,79,139 pertains to non-residential building. The assessee has reduced capital subsidy received towards plant & machinery from the opening WDV of block and computed depreciation. The assessee also 8 ITA 1246/Mum/2017 reduced capital subsidy received towards non residential building from opening WDV of the blocks. The AO has re-worked depreciation claimed on plant and machinery and non-residential building, after reducing capital subsidy received from Government of West Bengal from the amount of plant & machinery added to the block during the year under consideration and non residential building during the year under consideration on the ground that any capital subsidy received during the year pertains to acquisition of capital assets for the year under consideration. According to the AO, assessee has failed to file any evidence to prove that capital subsidy received from Government of West Bengal pertains to earlier period. It is the contention of the assessee that capital subsidy received from Government of West Bengal under West Bengal Industrial Development Corporation Incentive Scheme, 2000 for expansion plan undertaken at the Kharagpur factory and the subsidy received was on account of assets already created and in terms of Explanation 10 to the Proviso to section 43(1) of the Act, the assessee duly reduced the same from its opening WDV of the respective block of assets.

10 ITA 1246/Mum/2017 subsidy amount of 15% of total assets created by the assessee, there is no meaning for the AO to reduce it from the assets created during the current year to treat the balance amount as revenue receipts.

Therefore, se wet aside this issue also to the file of the AO to cause necessary enquiries in the light of claim of the assessee that such capital subsidy pertains to earlier period. If the AO finds that the capital subsidy received from government pertains to earlier period, then the AO is directed to allow deduction from opening WDV of the block of assets. The assessee is directed to file necessary evidence. In any case, capital subsidy cannot be treated as revenue receipt.