ACIT, CENTRAL CIRCLE- 29, NEW DELHI vs. AVICHAL BUILDCON PVT. LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : A : NEW DELHI (Through Virtual Hearing) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, MEMBER & 2475/Del/2018 Assessment Years: 2014-15 & 2015-16 ACIT, Vs. Avichal Buildcon Pvt. Ltd., Central Circle-29, 1711, S.P. Mukherjee Marg, Room No.318, ARA Centre, New Delhi. Jhandewalan Extn., New Delhi. PAN : AAFCA6846A (Appellant) (Respondent) Assessee by : Shri R.S. Singhvi, Advocate Revenue by : Shri Om Prakash, Sr. DR Date of Hearing : 28.10.2021 Date of Pronouncement : 14.12.2021 ORDER PER R.K. PANDA, AM:

The above two appeals filed by the Revenue are directed against the separate orders dated 31.01.2018 of the CIT(A)-30, New Delhi, relating to Assessment Years 2014-15 and 2015-16, respectively. Since identical grounds have been raised by the Revenue in both these appeals, therefore, these were heard together and are being decided by this common order for the sake of convenience.

ITA Nos.2418 & 2475/Del/2 (A.Y. 2014-15) 2. The grounds raised by the Revenue are as under:- “1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs. 2,82,79,733/- made on account of disallowance of depreciation u/s 32(1) r.w.s. 43(1) of the Act.

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

3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in relying upon the Hon’ble Supreme Court decision in the case of CIT vs. Meghalya Steel Ltd. wherein it was held that excise duty refund is a revenue receipt forming part of profits and gains, arising from business while dealing with deduction claimed u/s 80IB/IC of the Act whereas the issue under consideration is claim of depreciation in a situation in which the deferred government grants have been utilized by the demerged company in a direct manner in pursuance of notification issued under Central Excise Act, 1944.

4. That the grounds of appeal are without prejudice to each other.

5. The appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time hearing of the appeal.”

3. Facts of the case, in brief, are that the assessee company came into existence as a result of de-merger of the rubber thread unit of M/s Dharampal Satyapal Ltd. in a scheme of de-merger approved by the Hon’ble Delhi High Court vide order dated 11-09-2007. The stated main objects of the assessee company are manufacturing and sale of flexible laminates. The flexible laminates are being manufactured at the manufacturing unit located at Guwahati mainly and distributed/ sold through its business channels/ warehouses. It filed its return of income on 29.11.2014 declaring nill income under normal provisions as well as under section 115JB of the Act. During the course of assessment proceedings, the AO noted that during the course of assessment proceedings u/s 153A of the 2 & 2475/Del/2018 Income-tax Act in the case of M/s Dharampal Satyapal Ltd., directions u/s 142(2A) of the IT Act was issued for getting the books of account audited from an auditor appointed by the Income-tax Department. In the report of such special audit, the Special Auditor had made the following observations:-

4. The AO, therefore, noted that the assets of the assessee company have been acquired by it in a scheme of demerger approved by the Hon’ble High Court. He noted that the said assets were acquired by the de-merged company i.e. M/s Dharampal Satyapal Ltd out of the amount of excise duty exemption accounted as deferred government grants in its books of accounts. Therefore, in accordance with the provision of explanation 10 to section 43(1) of the Income Tax Act, the actual cost of such assets to the de-merged company shall be nil as the entire cost of the assets have been met by the Central Government. Further, in accordance with the provision of explanation 7A, the ‘actual cost’ to the resulting company i.e. the assessee company shall also be nil. Therefore, during assessment proceedings u/s 153A for the A.Y.2007-08 to A.Y. 2011-12, the assessee was categorically asked to explain as to why the actual cost of assets should not be modified in accordance with the provision of explanation 10 to section 43(1) of the Income Tax Act and depreciation claim should also not be recomputed accordingly. Rejecting the various explanations given by the assessee and following his order for the preceding assessment years i.e., 2007-08 to 2011-12, the AO disallowed an amount of Rs.2,82,79,733/- by observing as under:- “8.1 In this case, the assets on which depreciation has been claimed by the assessee company have been acquired out of government grants obtained by the De-merged company. The deferred government grants have been obtained by the de-merged company M/s Dharampal Satyapal Ltd. in pursuance of notification no. 69/2003 dated 25-08-2003 and notification no. 8/2004 dated 21-01-2004 issued under Central Excise Act, 1944. Since, the entire cost of the asset have been directly met by the Central government grant, the actual cost of the asset in accordance with the provisions of section 43(1) of the Income tax Act shall be nil. There is no disputing the fact that the assets were acquired by the de-merged company out of amount of excise duty exemption which has been classified by the de-merged company in its Books of account as deferred government grants. In the circumstances, the actual cost of the assets to the assessee company shall be reduced by the amount of deferred government grants utilized for acquisition of such assets whether by the de-merged company or the resulting company. 8.2 As per the accounting policies followed by the demerged companies, the depreciation claimed on similar assets remaining with the demerged company is first charged to the P&L account and simultaneous credit is also made to the P&L account thus nullifying the impact of depreciation. Thus evident that the claim of depreciation is not allowable on the assets acquired out of government grant. It is pertinent to mention here that the Hon’ble Supreme Court in the case of CIT vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC) has held that excise duty refund, is a revenue receipt, forming part of profits and gains, arising from business while dealing with deduction claimed u/s 80IB/IC of the Act whereas the issue under consideration is claim of depreciation in a situation in which the deferred government grants has been utilized by the demerged company(parent company of the assessee company) in a direct manner in pursuance of notification no. 69/2003 dated 25-08-2003 and notification no. 8/2004 dated 21-01-2004 issued under Central Excise Act, 1944. Therefore, the claim of depreciation has to be recomputed in view of the Explanation 10 of Section 43(1) to the extent the cost of acquisition has not been met by either the assessee or its parent company but with the assistance of the government in a direct manner.

9. Vide note sheet entry dated 18.12.2071, the AR of the assessee was show caused as to why the depreciation claimed should not be recalculated in light of explanation 10 of Sec 43(1) of the Income Tax Act. The assessee submitted its reply on 26.12.2017. The reply submitted by the assessee has been perused. The assessee has submitted that the Ld. CIT(A) relying upon decision of me Hon’ble Supreme Court in the case of CIT vs. Meghalya 5 Steels Ltd [2016] 383 ITR 217 (SC) and decision of jurisdictional High Court in the case of CIT vs. Dharampal Premchand Ltd [2009] 317 ITR 353 Delhi H.C] has deleted the additions on this issue in assessee’s own case for A.Y. 2012-13 & 2013-14. The above decision of the Ld. CIT(A) has not accepted and the revenue has gone in further appeal against the same. 10.1 As there is no change in facts and circumstances of the case in the assessment year under consideration, the excess claim of depreciation made by the assessee is being disallowed. As per para 5 above, the cost of the assets met out of the deferred government grants as on 31-03-2011 was Rs.55,72,52,172/-. During the year, no further investment has been made out of deferred government grants in plant & machinery. Therefore, the total investment in plant & machinery and other assets out of deferred government grants stands at Rs. 55,72,52,172/-. Thus, the cost of the assets met out of the deferred government grants comes to Rs. 55,72,52,172/-. Therefore, in accordance with the provision of section 43(1) of the Income Tax Act read with explanation 7 and explanation 10 of the said section, the actual cost of the assets is reduced by a sum of Rs. 55,72,52,172/-. The claim of depreciation u/s 32(1) of the Income Tax Act is therefore recomputed by reducing the actual cost of the assets by a sum of Rs. 55,72,52,172/-. The total claim of depreciation made by the assessee company is at Rs.4,98,61,124/-.The assessee submitted that additions in plant & machinery and computers during the years were made from own funds and no subsidy was utilized in the purchase of same. In view of submission of assessee, the depreciation on plant & machinery purchased during the year amounting to Rs. 2,15,81,391/- is allowed and the balance depreciation amounting to Rs. 2,82,79,733/- which was on the assets purchased out of subsidy is disallowed and added back to the total income of the assessee. (Addition Rs. 2,82,79,733/-“)”

5. In appeal, the CIT(A), following the orders of his predecessor for AYs 2012- 13 and 2013-14, deleted the disallowance of depreciation of Rs.2,82,79,733/-. The relevant observations of the CIT(A) read as under:- “4.4. Similar issue had presented itself in appeals for A.Y. 2012-13 & A.Y. 2013-14 in appellant’s own case. My predecessor, the then Id. CIT(A)-30, had adjudicated the issue in favour of the appellant, as follows- A.Y. Appeal No. Date of appeal order Operative part by my predecessor 2012-13 327/15-16/2304 15.7.2016 Para 4.4 (viii) on page 26 & 27 of that order 2013-14 71/16-17/2505 4.5 My predecessor had noted in his combined appeal order for A.Y. 2012-13 85 A.Y. 2013-14, in appeal No. 327/15-16/2304 & 71/16-17/2505, date of order 15.7.2016, at para 4.4(viii), as follows- “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. 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 Hon'ble Supreme Court, in the above referred case. Accordingly, findings of the A.O. are erroneous and therefore, disallowance of Rs.3,54,15,791/ -, is deleted. Accordingly, all the grounds, are hereby allowed for A.Y. 2012-13 & A.Y. 2013-14.” Respectfully following the precedence as available to me from the appeal order passed by my predecessor in the immediate preceding year, facts being same, issue being same, I adjudicate this ground in favour of the appellant.”

6. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:- “

1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs. 2,82,79,733/- made on account of disallowance of depreciation u/s 32(1) r.w.s. 43(1) of the Act.

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

3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in relying upon the Hon’ble Supreme Court decision in the case of CIT vs. Meghalya Steel Ltd. wherein it was held that excise duty 8 & 2475/Del/2018 refund is a revenue receipt forming part of profits and gains, arising from business while dealing with deduction claimed u/s 80IB/IC of the Act whereas the issue under consideration is claim of depreciation in a situation in which the deferred government grants have been utilized by the demerged company in a direct manner in pursuance of notification issued under Central Excise Act, 1944.

4. That the grounds of appeal are without prejudice to each other.

5. The appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time hearing of the appeal.”

7. We have considered the rival arguments made by both the sides and perused the record. We find, the AO, disallowed an amount of Rs.2,82,79,733/- being depreciation on plant & machinery which was purchased out of subsidy disregarding the order of CIT(A) on the ground that the department has not accepted the same and has filed appeal before the Tribunal. We find, the ld.CIT(A), deleted the addition by following the order of his predecessor, the reasons of which have already been reproduced in the preceding paragraphs. We find, against the order of the CIT(A) for AYs 2012-13 and 2013-14, the Revenue filed an appeal before the Tribunal and the Tribunal, vide & 5132/Del/2016, order dated 08.08.2019, has restored the issue to the file of the AO with certain directions. The relevant observation of the Tribunal from para 4 onwards read as under:-

4. We have heard the rival submission and perused the relevant material on record. The Tribunal while deciding the appeal of the Revenue as well as assessee in and ITA No. 824/Del/2015 respectively for assessment year 2011-12 observed as under:

6. After considering the facts of the case and submissions of both the sides, we deem it appropriate to set aside the orders of the authorities below on this point and restore the matter to the file of the Assessing Officer. 9 Admittedly, demerger took place in the year 2006 and thereafter whether the depreciation is to be allowed on the actual cost of demerged assets or the cost is to be reduced by any government grant received by the demerged company should have been examined in the assessment year 2007-08 and thereafter, year after year, depreciation is to be allowed on WDV. These facts are not available on record. We, therefore, direct the Assessing Officer to examine what happened in the preceding years. If in the preceding years the depreciation was not claimed or this issue was not considered and the facts of the case warrant the consideration of this issue in the year under consideration, then Assessing Officer will consider the same in the light of the decision of Hon'ble Apex Court in the case of Meghalaya Steels Ltd. (supra) and also the decision of ITAT in the case of Abhisar Buildwell Pvt.Ltd. vide ITA No.823/Del/2015. If the claim of depreciation of the assessee is allowed, then the assessed income will turn into negative income and there will be no question of claim u/s 80IC which will render the Revenue's appeal academic. If at all the Assessing Officer takes the decision to disallow the depreciation, then he will consider the claim of deduction u/s 80IC as per the direction of the learned CIT(A) in paragraph 5.5 of his order, which reads as under:- "5.5 Considering the entire facts and circumstances of the case, / admit the audit report in form 10CCB as fresh evidence and the same has been examined by the assessing officer on merits as well. No further opportunity is required as such. / have considered the judicial pronouncement relied by Ld. AR that the audit report in form 10CCB can be submitted before the first appellant authority specially under the circumstances when loss was claimed in return of income which was converted into positive income by making addition by the assessing officer. Accordingly, the assessing officer is directed to allow deduction u/s 80/C as per law treating that the requirement of filing audit report in form no. 10CCB is met."

ITA Nos.2418 & 2475/Del/2018 8. Since the ld.CIT(A) while allowing the claim of depreciation has followed the order of his predecessor for AYs 2012-13 and 2013-14 and since the order of the CIT(A) for AYs 2012-13 and 2013-14 has been restored to the file of the AO by the Tribunal, therefore, respectfully following the decision of the Tribunal in assessee’s own case for AYs 2012-13 and 2013-14, we restore the issue to the file of the AO for fresh adjudication in accordance with the directions of the Tribunal for AY 2012-13 and 2013-14. Needless to say, the AO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. We hold and direct accordingly. The grounds raised by the Revenue are accordingly allowed for statistical purposes. (A.Y. 2015-16)

9. The grounds raised by the Revenue reads as under:- “1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs. 2,52,90,990/- (wrongly typed as Rs.2,82,79,733/-) made on account of disallowance of depreciation u/s 32(1) r.w.s. 43(1) of the Act.

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

3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in relying upon the Hon’ble Supreme Court decision in the case of CIT vs. Meghalya Steel Ltd. wherein it was held that excise duty refund is a revenue receipt forming part of profits and gains, arising from business while dealing with deduction claimed u/s 80IB/IC of the Act whereas the issue under consideration is claim of depreciation in a situation in which the deferred government grants have been utilized by the demerged company in a direct manner in pursuance of notification issued under Central Excise Act, 1944.

4. That the grounds of appeal are without prejudice to each other.