THE GODAVARI SUGAR MILLS LTD.,MUMBAI vs. ACIT(OSD) RG.2(1), MUMBAI

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

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.

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

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.

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

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.”

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.

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.

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.

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.

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.

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.

In the result, both the appeals of the assessee are treated as partly allowed for statistical purposes.