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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
Date of hearing 05.08.2019 Date of pronouncement 08.08.2019 ORDER PER BENCH: These two appeals by the Revenue are directed against a common order dated 15/07/2016 passed by the Ld. Commissioner of Income-tax (Appeals)-30 [in short ‘the Ld. CIT(A)’] for assessment year 2012-13 and 2013-14, involving a common issue in dispute in identical set of the circumstances and, therefore, both these appeals were heard together and disposed off by way of this consolidated order for sake of convenience. For the sake of brevity, the grounds of appeal raised in are as under:
2 & 5132/Del/2016 1. On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete addition of Rs. 3,54,15,791/- made on account of disallowance of depreciation u/s 32(1) r.w.s.43(l) of the Act.
On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by holding that excise refund being revenue receipt cannot be reduced from the cost of plant & machinery.
3. That the order passed by Ld. CIT(A) is perverse inasmuch as it has failed to appreciate the material facts and circumstances of the case as brought on record in the assessment order.
4. The order of the CIT (A) is perverse, erroneous and is not tenable on facts and in law.
5. That the grounds of appeal
are without prejudice to each other.
6. The appellant craves leave to add, alter or amend any/ all of the grounds of appeal before or during the course of the hearing of the appeal.
2. Briefly stated facts of the case are that the assessee company has emerged as a result of the demerger of units of existing company M/s Dharmpal Satyapal Ltd. The assessee filed return of income for the assessment year 2012-13 on 29/09/2012 and for assessment year 2013-14 on 29/11/2013 declaring loss of Rs.3,51,62,271/- and loss of Rs.5,60,34,265/- respectively. In the scrutiny assessment completed under section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) for assessment years 2012-13 and 2013-14 on 30/03/2015 and 19/02/2016 respectively, the Assessing Officer made disallowance of the claim of the depreciation on plant and machinery. According to the Assessing Officer, the assets of erstwhile entity were acquired out of the amount of the excise duty exemption, which was accounted as deferred government grants in the books of accounts and therefore in accordance with the provision of Explanation-10 to section 43(1) of the Act, the actual cost of such assets of the demerged company should be nil as the entire cost of the assets had been met out by the Central 3 & 5132/Del/2016 Government. On further appeal, the Ld. CIT(A) deleted the disallowance by way of the common impugned order observing as under: “4.3 Findings:- The findings are as under: 4.4 I have carefully considered assessment order, written submissions, case laws relied upon and oral arguments of Ld. AR. The objections/ arguments of the appellant are discussed as under:- (i) Briefly stated the facts of the case, are that the ‘Flexible Packaging Unit’ and ‘Rubber Thread Unit’ of existing Company M/s Dharampal Satyapal Ltd. got demerged w.e.f. 01.4.2006, vide order of Hon’ble Delhi High Court dated 11.9.2007 and the resultant companies were named as M/s Avichal Buildcon Pvt. Ltd and M/s Abhisar Buildwell Pvt. Ltd. As per observations made by the Special Auditor, appointed in the case of M/s Dharampal Satyapal Ltd., the assets of the demerged Units, included assets acquired out of amount of Excise Duty Exemption (accounted as Deferred Govt. Grant in the books of the demerged company). The year wise amount spent in the case of the assessee company is given as under: (in Rs) Particulars Up to 31.3.2010 F.Y.2010-11 Upto 31.3.2011 Plant & - Machinery 40,34,32,866 40,34,32,866 Civil Works 15,38,19,306 - 15,38,19,306 Total 55,72,52,172 - 55,72,52,172 As per the scheme of demerger, all the assets and liabilities, have been vested in the resultant/ assessee Company. Further, all the incentives, subsidies and other benefits enjoyed like excise duty, income tax concession and exemptions, incentives granted by Central and State Govts., local authority or by another person, whether availed/ available to the erstwhile unit of M/s Dharampal Satyapal Ltd., shall vest with and be available to the wholly owned subsidiary resultant/ assessee company, on same terms and conditions. (ii) Based on the aforesaid observations of the Special Auditor, and in the light of provision of Section 43(1), Explanation 7A, A.O. was of the opinion that the actual cost of capital asset transferred to the appellant company, shall be taken to be same, as it would have been, if the demerged company had continued to hold the capital asset for the purpose of its own business. (iii) In the assessment order, A.O. has observed that the ‘actual cost’, as defined in Section 43(1) of the Act, has been stated to be ‘actual 4 & 5132/Del/2016 cost means the actual cost of assets to the assessee as reduced by that portion of the cost thereof, as has been met directly or indirectly by any other person or authority’. In the assessment proceedings, the assessee submitted that the refund of excise duty paid on the manufacturing activities, carried out in the notified area, is to promote the industries in such area. However, A.O. was of the views that excise duty refund, has been invested in assets in the notified area and therefore, as per Explanation 7 A and 10 of Section 43(1) the Act, such refund of excise duty, has to be reduced from the cost of assets, on which depreciation has been claimed. (iv) In the assessment proceedings, it was submitted by the assessee, that no cost of assets has been met out from the refund of excise duty by the existing assessee company after demerger. However, the above submissions of the assessee did not find favour with the A.O. and therefore, A.O. in the assessment order reduced the excise duty refund from the block of assets, as was done in A.Y.2007-08 to A.Y. 2011-12. Accordingly, the A.O. determined the depreciation on net WDV, which becomes NIL, as in the opinion of the A.O., all the assets falling in block of assets, have been purchased out of Excise duty refund, which resulted in NIL depreciation. Accordingly, A.O. observed that the cost of the assets met out of the deferred Govt, grants as on 31.3.2011, is Rs. 55,72,52,172/- and no further investment has been made out of deferred govt, grants in block of assets. The A.O has recomputed the claim of depreciation u/s 32(1) of the Act, by reducing the actual cost of assets by a sum of Rs.55,72,52,172/- and the excess claim of depreciation made by the appellant company to the tune of Rs.3,54,15,791/-, has been disallowed. (v) In the appellate proceedings, the appellant has reiterated the arguments submitted in the assessment proceedings and has also submitted that the excise duty refund is a revenue receipt, which has been credited to the P & L Account. The nature of the excise duty refund received is like a benefit of cash assistance, arising from business and therefore, same will form part of profits and gains from business. Accordingly, it is submitted by the AR that in view of the fact that the excise duty refund is a revenue receipt and therefore, same cannot be further reduced from the block of assets, for determining depreciation on the reduced WDV. For the above view, the AR has also relied upon the judgment of the Apex Court in the case of Commissioner of Income Tax vs. Meghalaya Steels Ltd. [2016] 383 ITR 217, wherein it has been held that the subsidy forming part of P&L Account, being revenue in nature, has to be treated as derived from business or an industrial undertaking and will form part of business income, on which deduction u/s 80IB/ 80IC, is allowable.
5 & 5132/Del/2016 (vi) The appellant has further submitted that the grant of excise duty exemption, was accorded as per the scheme of Central Govt, vide notifications issued in this regard (Notification No. 8/2004 of Central Excise dated 02.01.2004) to the existing unit and the exemption of excise duty so granted, was to be utilized in the development of the state by setting up or by making investment in another unit in the same state or other notified state. The quantum of such excise duty collected, but not deposited with Govt., has been the part of revenue receipts duly credited in the P & L Account on year to year basis, on the sales affected by the entrepreneurs. Therefore, it is further submitted that the Special Auditor failed to appreciate the scheme of excise duty exemption notified by the Central Govt, and wrongly observed that investment in Plant & Machinery(P & M), was made out of the Govt., grant by the erstwhile company M/s Dharampal Satyapal Ltd. As per notification of the Central Govt., such excise duty payable, but is exempt in this notification, and same shall be utilized by the manufacturer, only for investment in: � P & M in a manufacturing unit located in the concerned states, and/ or � Infrastructure or civil works or social projects in such states. Therefore, the utilization of excise duty refunds, were meant not only for P&M, but also for infrastructure or social projects, not meant for reduction thereof from the cost of investments made in Plant & Machinery. At best, it can be said that such refunds were meant for promotional activities by setting up new units in the area notified itself. It is further submitted by the AR that the excise duty refund is not in the form of capital subsidy, but is a revenue receipt forming part of taxable income. Therefore, such kind of subsidy cannot be reduced from the block of asset to determine the actual cost of assets in the hands of the assessee. (vii) In the earlier A.Y. 2007-08 to A.Y. 2011-12, the submission were made before the A.O. as well as in appellate proceedings, before Ld. CIT(A) that the scheme of demerger was approved by the Hon’ble High Court, and therefore, it amounts to approval of the cost of acquisition of assets in the hand of the resulting companies, after demerger. Therefore, the claim of depreciation has been correctly made on such cost of assets transferred to the resulting companies and there is no scope for making any disallowance against claim of depreciation made on such acquired value of assets, without reducing the Excise duty refund. However, the excise duty refund, was always credited to the P & L Account and therefore, it was always treated as revenue receipt in the books of account from A.Y. 2007-08 onwards. However, the appellant did not make submission before the A.O. as well as before Ld. CIT(A), regarding nature of excise duty refund.
6 & 5132/Del/2016 However, the submissions now made on account of nature of excise duty refund and decision of Apex court in the case of Commissioner of Income Tax Vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC), was not available earlier. Therefore, it is submitted that now the ratio led down by the Hon'ble Supreme Court, is equally applicable to the facts of the appellant, since the excise duty refund is a revenue receipt, forming part of profits and gains, arising from business. Therefore, as per AR, this excise duty refund has already suffered tax. On identical facts, as to whether excise duty refunds are revenue receipt or capital receipt, the jurisdictional High Court in the case of CIT vs. Dharampal Premchand Ltd [2009] 317 ITR 353-Delhi H.C] has held that ‘the excise refunds received by the Units are eligible for deduction u/s 80IB of the Act and such deduction is inclusive of excise benefits received by the Units’. The SLP preferred by revenue against this judgment to the Hon’ble Supreme Court, was dismissed, on the ground that refund of excise duty should not be excluded in arriving at profit derived from business for the purpose of claiming deduction u/s 80IB of the Act, as has been correctly held by the jurisdictional High Court. Therefore, the excise duty refund cannot be treated as capital receipt, in order to reduce the same from the cost of investment made in Plant & Machinery, as per section 43(1) of the Act. The AR has further submitted that the Hon'ble Supreme Court, in the above referred case of Commissioner of Income Tax Vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC), has also approved the decision of jurisdictional High Court in the case of CIT vs. Dharampal Premchand Ltd [2009] 317 ITR 353-Delhi H.C]. (viii) 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 7 & 5132/Del/2016 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.”
At the outset, before us the Ld. counsel of the assessee submitted that issue in dispute is covered by the order of the Tribunal in for assessment year 2011-12.
8 & 5132/Del/2016 The Ld. DR did not controvert above statement of Ld. counsel of the assessee.
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 ITA No. 4876/Del/2014 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. 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 1OCCB 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."
Respectfully following the decision of the Tribunal (supra), we restore the issue in dispute to the file of the Assessing Officer to decide in accordance with the direction of the Tribunal (supra).
It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The grounds of the appeal of the Revenue are accordingly allowed for statistical purposes. 7. In the result, both the appeals of the Revenue are accordingly allowed for statistical purposes. Order is pronounced in the open court on 8th August, 2019.