Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “G” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
Both these appeals filed by the assessee are directed against separate orders passed by the learned CIT(A)-4, Mumbai for A.Ys. 2003-04 & 2004-05.
2. Since one of the issues urged in these appeals are identical, we proceed to dispose of these appeals by this common order, for the sake of convenience.
3. We shall first take up the appeal filed by the assessee for assessment year 2003-04. The appeal is barred by limitation by 10 days. We heard the parties on this preliminary issue. Having regard to the submissions made by the assessee, we condone the delay and admit the appeal for hearing. The assessee has filed corrected grounds of appeal as well additional grounds of appeal. The final grounds of appeal read as under:-
2 The Godavari Sugar Mills Ltd.
1) The learned Commissioner of Income-tax (Appeals) erred in con firming the non-granting depreciation to the extent of Rs.1,99,36,263/- (Rs.44,59,00,867-42,59,64,604/-). Your appellants submit that the same is allowable and ought to be allowed.
2) The learned Commissioner of income-tax (Appeals) erred in confirming the action of the Assessing Officer in reducing the costs of the machinery by Rs.2,96,24,000/(Rs. 1,29,94,000+Rs. 1,66,30,000) being the amount of grant received under US Aid Project from IDBI and consequently reducing the claim of depreciation by Rs.1,18,49,600/- (40% of Rs.2,96,24,000/-). Your appellants submit that the amount in question ought not to have been reduced from the cost of machinery and correspondingly the depreciation ought to have been allowed as claimed.
3) The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of the appellants claim for deduction of Rs.43,30,180/- u/s.80HHC from the adjusted book profit u/s.115JB of the Income-tax Act 1961. Your appellants submit that the said deduction is allowable and ought to have been allowed.
Additional ground The Assessing Officer (the Ld.AO for short) erred in not allowing deduction in respect of the revised purchase price of sugarcane Rs.1,03,58,250/- while computing income for the year under consideration, which was disallowed by him in Assessment Year 2002- 03 on the ground that the said escalation of price crystallized in Assessment Year 2003-04.
Facts relating to the case are stated in brief. The assessee company is engaged in the business of manufacture of various types of chemicals and also engaged in production of sugar from sugarcane. For its sugar factory, the assessee had made its own arrangement for generation and supply of power using conventional coal, wood, oil etc. The assessee has also installed a co- generation power plant and used “bagasse”, being sugarcane residue left after manufacture of sugar generating power. The usage of bagasse is eco friendly and produces less carbon.
The Government of India and United States of America (acting through United State Agency for International Development (USAID)) entered into an agreement on 10.4.1995 for undertaking Greenhouse Gas Pollution Prevention
3 The Godavari Sugar Mills Ltd.
Projects in India, which was designed to reduce emission of greenhouse gases in India. Under the scheme, IDBI was appointed as implementing agency by the Government of India. Under the above said agreement, USA, acting through USAID, has agreed to contribute certain sum as sub-grant to assist in meeting the cost of carrying out the gas pollution prevention project. Under the scheme, the assessee received a sum of ` 1,66,30,000/- during the financial year 2001-02 and ` 1,29,94,000/- during the year under consideration. Thus the assessee received a sum of ` 2,96,24,000/- in aggregate under the above said scheme as sub-grant upon installation of co- generation power plant. The assessee-company treated the above said amount as capital receipt. The Assessing Officer noticed that the amount has been received by the assessee to meet the cost of asset and hence, in terms of Explanation 10 to section 43(1), the same is required to be deducted from the cost of asset for the purpose of computing depreciation. Accordingly, he reduced the amount of ` 2,96,24,000/- from the cost of asset of co-generation plant and allowed depreciation accordingly. The learned CIT(A) also confirmed the order passed by the Assessing Officer. The ground no.1 and 2 urged by the assessee relate to this issue.
According to the assessee, the Assessing Officer while computing eligible amount of depreciation has made certain clerical mistake, which has resulted in allowing depreciation at a lower figure.
In the third ground of appeal the assessee is claiming that the Assessing Officer should have allowed deduction u/s. 80HHC of the Act while computing book profit u/s. 115JB of the Act.
In the additional ground of appeal the assessee is claiming deduction of an amount which was disallowed in A.Y. 2002-03 by holding the same crystallized in A.Y. 2003-04. Accordingly the assessee prays that the deduction be allowed in the assessment year 2003-04 as per the decision taken by the AO in AY 2002-03.
4 The Godavari Sugar Mills Ltd.
We shall first take up Ground No.1 & 2 relating to the sub-grant received by the assessee, i.e., the same is required to be deducted from the cost of asset for the purpose of allowing depreciation or not. Learned AR contended that the objective of agreement entered into between India and USA was intended to reduce the emission of greenhouse gases and hence the larger objective was to reduce the carbon in the environment. Accordingly it was contended that the sub-grant cannot be considered to have been given to the assessee to meet the cost of machineries. He submitted that the assessee has met the cost of assets out of its own resources and the sub-grant was received subsequently. He submitted that the objective behind the scheme should be considered, i.e., the objective was to reduce emission of greenhouse gases and not to part finance the cost of assets installed by the assessee. Accordingly he submitted that the Explanation 10 to sec.43(1) shall not have application in the facts of the instant case. In support of these propositions, Learned AR placed reliance on the following case laws: CIT Vs. P.J. Chemicals Ltd. (210 ITR 830) Sasisri Extraction Ltd. Vs. CIT (307 ITR 127) Godrej Agrovet Ltd. (ITA No. 1629/Mum/2009) ACIT Vs. Harinagar Sugar Mills (ITA No. 772/Mum/2012) Cinemax India Ltd. Vs. DCIT (ITA No.1287/mum/2012) UniDeritend Ltd. Vs. Add.CIT (ITA No. 3474/Mum/2013)
On the contrary, learned Departmental Representative submitted that sub-grant has been given to the assessee as a “financial assistance” for the project executed by the assessee. Referring to clauses 2.3.2 & 2.3.4 of the Article II of the Sub-grant Agreement, learned Departmental Representative submitted that the agreement specifically provides that the grant shall be used exclusively to finance the cost of goods. Learned Departmental Representative submitted that various case laws referred by the assessee are distinguishable on the ground that the subsidy therein was provided in order to meet some social objective and not to part of finance the cost of asset, whereas in the instant case, sub-grant has been provided specifically to part finance cost of asset. Learned DR placed reliance on the decision rendered by Hon'ble
5 The Godavari Sugar Mills Ltd.
Karnataka High Court in the case of Shri Renuka Sugar Ltd. (ITA No. 5006/2011 c/w dated 31.8.2012) and submitted that the assessee before Hon'ble High Court received subsidy from the Government of Karnataka and Hon'ble High Court has held that Explanation 10 to section 43(1) shall be applicable and accordingly held that the subsidy amount shall be deducted from the cost of the asset to the assessee.
We have heard rival contentions on this issue and perused the record. The title to the Sub-grant Agreement reads as under:- “Alternative Bagasse Cogeneration Component of Greenhouse Gas Pollution Prevention (GEP) Project” – Funded by United States Agency for International Development.
The preamble of the agreement entered by the assessee with the implementing agency reads as under:- WHEREAS 1. A Project Agreement (hereinafter referred to as “the GEP Agreement”) has been executed on April 10, 1995 between the Government of India and the United States of America acting through United States Agency for International Development (hereinafter referred to as “USAID”) with IDBI as co-signatory for undertaking a Greenhouse Gas Pollution Prevention (GEP) Project which is designed to reduce emission of greenhouse gases in India.
Under the GEP Agreement, the United States of America acting through USAID has agreed to contribute a certain sum as sub-grant (hereinafter referred to as “USAID-Grant Resources”) to assist in meeting the costs of carrying out the GEP Project.
The Sub-Project Participant** has submitted a proposal for setting up Alternative Bagasse Cogeneration Project (** assessee herein)… The definitions part of the Agreement is given in ARTICLE – I. The relevant portions are given below:- (a) “Project” means the project to be financed by the sub-grant as described in Schedule I hereto.
(b) “Financing Plan” means the financing plan as described in Schedule II hereto. (c) ……
6 The Godavari Sugar Mills Ltd.
(d) “Sub-grant” means the financial assistance agreed to be provided by IDBI out of USAID Grant Resources for the Project approved by the appropriate authority under the GEP Agreement.
Article II of the agreement specifies the terms and conditions of Sub-grant. Following clauses are relevant here:- 2.2 Drawal of sub-grant:- Drawal of sub-grant shall by way of reimbursement. The Sub- Project Participant after incurring the expenditure for the purposes of Project from its own resources and then make application requesting reimbursement on a quarterly basis of the expenditure incurred from IDBI out of USAID Grant Resources along with proof of having incurred the expenditure.
2.3.1 Utilisation of the sub-grant:-
The Sub-Project Participant shall utilize the sub-grant for the purposes of the Project. No portion of the sub-grant shall be utilized for payment of duties, levies, taxes, cesses fees or payments of similar nature which are not eligible for USAID project financing, such as procurement of goods and services from unauthorized sources as mentioned in 2.3.2 & 2.3.4 below.
2.3.2 Foreign Exchange Cost
The foreign exchange cost shall be used exclusively to finance the cost of goods and services required for the Project having with respect to goods, their sources and origin and with respect to services, their nationality in code 935 countries of the USAID Geographic Code Book as in effect at the time orders are placed or contracts are entered into for such goods and services.
2.3.3 ………
2.3.4 Local Currency cost of the Project
Disbursement out of local currency shall be used exclusively to finance the cost of goods and services for the Project having their source and origin in India.
We shall now examine the relevant sections of the Income tax Act. The depreciation u/s 32 of the Act is allowed on “actual cost” in respect of assets of undertaking engaged in generation or generation and distribution of power. In case of other undertakings, the depreciation is allowed on the written down
7 The Godavari Sugar Mills Ltd. value of “block of assets”. The term “written down value” has been defined in sec. 43(6) of the Act, wherein also the term “actual cost” is used. The expression “actual cost” has been defined in sec. 43(1) as under:- “ “Actual cost” means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.”
Explanation 10 to sec. 43(1) is relevant here and the same reads as under:- “Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.”
The above said Explanation 10 was inserted by the Finance (No.2) Act, 1998 w.e.f. 1.4.1999.
Before insertion of Explanation 10, the meaning of the term “actual cost” in the context of requirement of deducting the subsidy from the cost, came for the consideration of the Hon’ble Supreme Court in the case of CIT vs. P.J.Chemicals Ltd (210 ITR 830). The Hon’ble Apex Court made following observations:- “The question in the present context is not whether if a portion of the cost is met directly or indirectly by any other person or authority, it should be deducted or not. Quiet obviously, the plain meaning of the section is that is shall be. But the real question is as to the character and nature of a subsidy whether it was really intended to subsidise the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid. The contention is that it is not a payment, directly or indirectly, to meet any portion of the “actual cost” but intended as an incentive to entrepreneurs, its quantification determined at a percentage of the fixed capital cost.”
The Hon’ble Supreme Court considered the decision rendered by Hon’ble Andhra Pradesh High Court in the case of Godavari Plywoods (1987)(168 ITR
8 The Godavari Sugar Mills Ltd.
632), wherein it was held that the subsidy need not be deducted from the cost of assets for the purpose of computing depreciation, since the scheme under which the subsidy was given nowhere provided as to how the subsidy should be utilized and for which assets. The Hon’ble Supreme Court also considered the decision rendered by Hon’ble Gujarat High Court in the case of CIT Vs. Grace Paper Industries P Ltd (1990)(183 ITR 591), wherein the Hon’ble Gujarat High Court held that the basis for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and the subsidy was not given for the specific purpose of meeting any portion of the cost of the fixed assets. Consequently, the subsidy did not form part of the actual cost of plant and machinery within the meaning of section 43 of the Income tax Act, 1961. Accordingly the Hon’ble Gujarat High Court held that the subsidy cannot be deducted from the cost of assets in computing depreciation, development rebate and investment allowance. The Hon’ble Supreme Court noticed that a contrary decision had been taken by Hon’ble Punjab and Haryana High Court in the case of CIT Vs. Jindal Brothers Rice Mills (1989)(179 ITR 470). Finally the Hon’ble Supreme Court held as under:- “The Government subsidy, it is not unreasonable to say, 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”. We should prefer the reasoning of majority of the High Courts to the one found acceptable by the High Court of Punjab and Haryana.”
What we understand from the above said decision of Hon’ble Supreme Court is that the subsidy given by the Government to achieve specific objectives like promotion of industries in backward areas etc., is to be considered as an “incentive” and cannot be considered as given to meet the actual cost of asset. In that case, it was held that the subsidy amount need not be deducted from the actual cost, since the same is not given to meet the “actual cost”. The same view was taken by the Visakhapatnam bench of Tribunal in the case of Sasisri Extractions Ltd (2008)(307 ITR (AT) 127), wherein the Tribunal noted that the subsidy was given under a scheme to 9 The Godavari Sugar Mills Ltd.
accelerate industrial development of the State and the incentive was given for setting up of industries in Andhra Pradesh. The Tribunal considered Explanation 10 to section 43(1) and concluded that the basic principle underlying in the decision of the Apex Court in the case of P.J. Chemicals Ltd (supra) still holds the field. It further observed as under:- “….Their Lordships analysed the expression “met directly or indirectly” to come to the conclusion that only in a case where a subsidy or other grant was given to offset the cost of an asset, such payment/grant would fall within the expression “met” whereas the subsidy received merely to accelerate the industrial development of the State cannot be considered as payments made specifically to meet a portion of the cost of the assets.”
In the instant case, we notice that the sub-grant was given by USAID to meet the cost of carrying out the GEP Project, i.e., the purpose of giving sub- grant is not to achieve a different objective, as we found in the cases discussed above. We notice that the sub-grant has been given to the assessee specifically to meet the cost of assets and the same is evident from the various clauses of agreement extracted by us in the earlier paragraph. Further the agreement mandates that the sub-grant should be used for specific purpose of implementing GEP project and not for any other purpose, meaning thereby, the sub-grant was intended to part finance the cost of installation of co- generation plant. Hence, in our view, the decision rendered by Hon’ble Supreme Court in the case of P.J. Chemicals (supra) will not apply to the facts of the present case. In that view of the matter, the decision rendered by the co-ordinate bench of Tribunal in the case of M/s Sasisri Extractions Ltd (supra) will also not apply.
In view of the above, we uphold the view taken by the tax authorities on this issue, i.e., the sub-grant received by the assessee should be deducted from the cost of the assets for the purpose of computing depreciation.
The assessee has also pointed out that there are certain computation errors in the quantum of depreciation allowed by the AO. We restore this matter to the file of the AO for examining the claim of the assessee.
10 The Godavari Sugar Mills Ltd.
The Ground No.3 relates to the deduction claimed u/s 80HHC of the Act while computing book profit u/s 115JB of the Act. The Ld A.R submitted that this issue is covered by the decision of Hon’ble Supreme Court rendered in the case of Ajantha Pharma (327 ITR 303). Accordingly we restore this issue to the file of the AO for examining the claim of the assessee in terms of the decision rendered by Hon’ble Supreme Court in the above cited case.
In the additional Ground, the assessee is seeking claim for deduction of expenditure disallowed in AY 2002-03 on the ground that the same pertains to AY 2003-04. This claim has been put forth for the first time before the Tribunal. Hence we restore this issue to the file of the AO with the direction to examine the claim of the assessee in accordance with the law.
We shall now take up the appeal filed by the assessee for AY 2004-05. The assessee did not press Ground No.3 and hence the same is dismissed as Not Pressed. The remaining grounds relate to the following issues:- (a) Disallowance of prior period expenses & Cane price (b) Deduction of sub-grant received from actual cost of the asset for the purpose of computing depreciation.
(c) Errors in computation of depreciation (raised in Additional ground)
The second issue relating to deduction of the amount of sub-grant from the actual cost of the asset has been considered by us in the appeal relating to AY 2003-04 in the earlier paragraphs. Consistent with the view taken therein, we hold that the tax authorities are justified in deducting the amount of sub- grant from the actual cost of the asset for the purpose of computing depreciation. Accordingly we dismiss this ground of the assessee.
The assessee has raised an additional ground with regard to the errors in the computation of depreciation. We restore this issue to the file of the AO for examining the claim of the assessee.
11 The Godavari Sugar Mills Ltd.
In case of disallowance of prior period expenses, the assessee has made following submissions:- (a) The AO has taxed prior period income, but chose to disallow the prior period expenses.
(b) In case of Sugarcane price, the liability got crystallized during the year under consideration only.
(c) In case of other items, the disallowing the same in the current year and allowing them in other years will be tax neutral. Hence there is no required to disallow the same as per the decision of Hon’ble Supreme Court rendered in the case of CIT Vs. Nagari Mills Ltd (1958)(33 ITR 681)(Bom).
We heard the Ld D.R on this issue. With regard to the claim of the assessee that the Sugarcane price got crystallized, we restore the same to the file of the AO for his examination. If the claim of the assessee is found to be correct, then the same has to be allowed as the date of crystallization of the liability shall be taken as date of accrual. In this view of matter, the additional ground raised by the assessee with regard to Sugarcane price is also restored to the file of the AO for making fresh examination. With regard to other expenses (Insurance Premium and Other expenses), since the AO has taxed the prior period receipts, it would be fair to set off the same against the other expenses and to disallow only net amount thereof. We notice that the assessee has not given any explanation as to how these expenses were omitted to be accounted in the relevant year. Hence we are of the view that the claim relating to these expenses also requires fresh examination at the end of the AO. Accordingly we restore this issue also to the file of the AO for making fresh examination.
12 The Godavari Sugar Mills Ltd.
In the result, both the appeals of the assessee are treated as partly allowed for statistical purposes.
Order has been pronounced in the Court on 8.3.2017.