Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, PUNE “A” BENCH : PUNE
Before: SHRI SATBEER SINGH GODARA & DR. DIPAK P. RIPOTE
the “NFAC”] Delhi’s Din and Order No. ITBA/NFAC/S/250/ 2023-24/1056268156(1), dated 19.09.2023; whereas, the latter assessment year 2018-2019 contains the taxpayer’s appeal in ITA.No.1157/PUN./2023 arising against the very authority’s Din and Order No.ITBA/NFAC/S/250/2023-
2 ITA.No.1156, 1157 & 1203/PUN./2023 24/1056406394(1), dated 22.09.2023, involving proceedings u/sec.143 of the Income Tax Act, 1961 (in short "the Act"); respectively.
Heard both the parties at length. Case files perused. We proceed assessment year-wise for the sake of convenience and brevity. ITA.No.1156/PUN./2023 – A.Y. 2014-2015 :
The assessee pleads the following substantive grounds in the instant appeal :
1. “The Ld. AO & CIT(A) ought to have treated the IPS subsidy received of Rs.96,23,314/- under PSI scheme as Capital Asset neither liable to tax nor to be reduced from Block of asset.
2. The Ld. AO erred in and Ld CIT(A) erred in confirming that the amount of IPS subsidy of Rs.96,28,314/- to be reduced from the cost of asset and thereby reducing the claim of depreciation by Rs.14,44,247/-.
2.1. The Ld AO and Ld CIT(A) erred in not considering the fact though quantum of subsidy is based on investment in various assets the subsidy is given for developing backward areas and therefore it is capital in nature and 3 ITA.No.1156, 1157 & 1203/PUN./2023 not liable for tax and the said subsidy is received as one of incentives under PSI 2007.
The appellant craves its right to add to or alter the Grounds of Appeal at any time before or during the course of hearing of the case.”
3. Both the learned representatives next invited our attention to the NFAC’s detailed discussion affirming the assessment findings invoking sec.43(1) Explanation-10 to reduce the assessee’s cost of acquisition of the relevant fixed ‘assets’ involving disallowance of Rs.96,28,314/- as follows :
“4.3. Ground No.3 relates to treatment of PSI subsidy received. During the year, the appellant has received an amount of Rs.96,28,314/- as subsidy under PSI Scheme 2007 of the Government of Maharashtra. The AO treated the subsidy for acquiring the fixed assets and accordingly reduced the subsidy amount from addition to block of plant and machinery. Since the block of assets gets reduced, the AO reduced the deprecation allowance by Rs.14,44,247/- by adopting 15% depreciation and added the same to the income of the appellant.
4.3.1. The appellant has contended that it has considered the subsidy so received as capital receipt not liable for tax and not to be reduced from block of asset. The appellant has further contended that quantum of subsidy is 4 ITA.No.1156, 1157 & 1203/PUN./2023 received/accrued is computed based on the capex investment made by the appellant and is not by way of reimbursement of cost of capex made by it.
On examination of the eligibility certificate for expansion unit issued by Directorate of Industries dated 28.01.2013 under the Package Scheme of Incentives 2007, it is observed that the amount of subsidy is quantified on the basis of investment in capital asset (plant & machinery) for expansion of the present capacity of manufacturing automobile engine parts, which is to the tune of Rs.151.20 Lakhs i.e. 12.50% of accepted investment for expansion project of Rs.1209.57 Lakhs. All these facts clearly show that the quantum of subsidy is based on amount of capital expenditure in plant & machinery installed for expansion of the manufacturing capacity and therefore, appellant’s argument that the subsidy is not for meeting capital expenditure is not supported by any evidence. Further, the decision in the case laws relied upon by the appellant is not applicable in the present case because the subsidy is directly related to the acquisition of plant & machinery for expansion of the existing capacity in the present case whereas the subsidy under consideration in the cited case laws relate to new
5 ITA.No.1156, 1157 & 1203/PUN./2023 investment in backward areas and not directly linked to investment in any asset.
4.3.2. In the assessment order, the AO has stated that the subsidy amount has to be reduced from the cost of assets as per the provision of section 43(1) of the Act whereas the appellant contended during the assessment proceedings that section 2(24)(xviii) is applicable from 1.4.2017 and doesn’t apply for the present financial year.
Perusal of section 2(24)(xviii) of the Act reveals that it is inserted by the Finance Act, 2015 w.e.f 01.04.2016 but this provision has also an exclusion of subsidy which is considered for determination of actual cost of the assets as
per Explanation 10 to clause (1) of section 43. Therefore, the section 2(24)(xvii) is applicable for subsidy other than the subsidy for capital investment and the AO has rightly applied the Explanation 10 below to section 43(1) of the Act in the present case. It is pertinent to mention here that the appellant contests the applicability of Explanation 10 below to section 43(1) of the Act during the appellate proceedings.
In view of above discussion, I am of the considered view that the subsidy received by the appellant on expansion of unit by investment in plant & machinery is capital in nature. Therefore, the amount of subsidy needs
6 ITA.No.1156, 1157 & 1203/PUN./2023 to be reduced from the cost of the asset resulting into reduction in quantum of depreciation on such assets.
Therefore, the addition of Rs.14,44,247/- made by the AO wherein depreciation rate is applied by reducing the amount of subsidy received in cost of assets is hereby confirmed. Thus, this ground of appeal is dismissed.”
4. We have given our thoughtful consideration to the vehement rival submissions against and in support of the impugned sec.43(1) Explanation-10 disallowance and find no merit in Revenue’s stand. This is for the precise reason that the tribunal’s recent coordinate bench’s order in ITA.No.1912/PUN./2019 dated 06.07.2022 Atharva Polymers Private Limited vs. DCIT has already settled the issue in assessee’s favour and against the department regarding the very PSI scheme vis-à-vis applicability of sec.43(1) Explanation -10 qua cost of acquisition of the fixed assets as under:
“6. Ground No.3 is regarding Subsidy received from Govt of Maharashtra. It is a fact that Govt. of Maharashtra vide letter dated 13.12.2013 sanctioned Provisional Industrial Promotion Subsidy of Rs.69.84 lacs under the Package Scheme of Incentives -2007, subject to the conditions mentioned in the letter. As per Govt. of Maharashtra letter dated 03.03/2012 (ref no.DIC/PUNE/PSI-2007/EC-29/2012) this subsidy was for making investment towards the project at Gat No.596, Hissa
7 ITA.No.1156, 1157 & 1203/PUN./2023 No.1,Dhoke, Sanghavi Dist. Pune which was called as eligible project. Assessee was granted Electricity Duty Exemption for the period of 14 years 4 months. Industrial Promotion Subsidy equivalent to 27.14% of eligible investment Rs.151.35 lacs, 6 years and 4 months. The Govt. of Maharashtra had specifically asked to make investment in the eligible project and directed the assessee to communicate the value of fixed assets acquired during the specified period.
7. We find that in this case the substantive issue involved is subsidy under Industrial Promotion Scheme (IPS). The ITAT Pune Bench on identical issue, in the case of DCIT Vs. Bhagyalaxami Rolling Mills Pvt. Ltd in IT(SS)A No.7 to 10/PUN/2019 vide order dated 08/05/2022 has held as under :
Quote, “3. The only issue for adjudication in all these appeals is whether the assessee having received subsidy from Government of Maharashtra under Package Scheme of Incentives of 2007 (hereinafter referred to as „PSI 2007‟ for short) whether the said subsidy is capital receipt or a revenue receipt. Taking the lead case IT(SS)A No. 7/PUN/2019 for A.Y. 2011012 for the narration of facts, we find that the assessee being a private limited company is engaged in manufacturing of steel at Jalna. The assessee-company had set up a mega project as defined in Government of Maharashtra‟s PSI 2007 in Jalna. Under the scheme PSI 2007 mega project the assessee has 8 ITA.No.1156, 1157 & 1203/PUN./2023 received capital incentive subsidy in different years from A.Y. 2010-11 to 2015-16………………..
10. Reverting to the facts of the present case, we find
that in view of the above referred judgment, the whole purpose and the grant of subsidy under PSI 2007 by Government of Maharashtra was to promote industrial growth in the less developed areas of the State and also to provide employment in the area. Once this purpose is established the subsidy has to be a capital receipt. However, the position has changed w.e.f.
01.04.2016 relevant to A.Y. 2017-18 onwards with the amended provision of sub-clause (xviii) to sec. 2(24) of the Act. However, at present, we are concerned with A.Y. 2011-12 to 2015-16. Therefore, the amended provision of sec. 2(24) sub-clause
(xviii) is not applicable to the years under consideration and thus as a natural consequence the subsidy received by the assessee would therefore, not form part of its total income. In view of the aforestated facts and circumstances and the judicial pronouncements, we do not find any reason to interfere with the findings of the ld. CIT(A) and the reliefs provided to the assessee is sustained. Therefore, the appeal of the Revenue in IT(SS)A No.07/PUN/2021 for A.Y. 2011-12 is dismissed.”Unquote.
8. On identical facts, the ITAT Pune Bench in the case of ITO, Ward-6(1) Vs. Shrinivas Engineering Auto Components Pvt. Ltd.,
9 ITA.No.1156, 1157 & 1203/PUN./2023 in vide order dated 27/4/2022 has held as under :
Quote, “ 10. We heard the rival submissions and perused the material on record. We have carefully gone through the Package Scheme of Incentives, 2007, the preamble of the scheme, extracted above, clearly indicates the intention behind grant of subsidy was to encourage the setting up the new industries in under developed region in the State of Maharashtra. Indisputably, it is not the case of the Assessing Officer that the subsidy is revenue in nature, as the Assessing Officer himself had invoked the provisions of Explanation 10 to section 43(1) of the Act. Therefore, the issue that arises for our consideration in the present appeal is whether the amount of subsidy received from the Government of Maharashtra shall go to reduce the actual costs of assets u/s 43(1) for the purpose of allowing the depreciation u/s 32 of Act. No doubt, the subsidy was granted in terms of the certain percentage of fixed assets to be disbursed in the form of refund of octroi, electricity duty exemption, entry tax refund, VAT etc. over a period of 8 years. Then the next question, that arises for consideration in such circumstances is that, can be it said that subsidy is granted to meet the cost of the actual fixed assets, merely because the amount of subsidy is calculated in term of certain percentage of investment in fixed assets. The Hon’ble Supreme Court had an occasion to consider the identical issue in the case of CIT vs.
10 ITA.No.1156, 1157 & 1203/PUN./2023 P.J. Chemicals Ltd., 210 ITR 830 and after review of the case law on the point, the Hon’ble Supreme Court held as under :-
“Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the 'actual cost. The expression 'actual cost in section 43(1) of the Income-tax Act, 1961, needs to be interpreted liberally.
Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from 'actual cost'. The amount of subsidy is not to be deducted from the 'actual cost' under section 43(1) for the purpose of calculation of depreciation etc.” 11. The Hon’ble Gujarat High Court in the case of CIT vs. Swastik Sanitary Works Ltd., 286 ITR 544 (Guj.) following the principle laid down by the Hon’ble Supreme
Court in the case of P.J. Chemicals Ltd. (supra) held that the subsidy is intended as an incentive to encourage entrepreneurs to move and establish industries,, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the “actual cost” as defined under the provisions of section 43(1) of the Act. Similarly, the 11 ITA.No.1156, 1157 & 1203/PUN./2023 Hon’ble Bombay High Court in the case of PCIT vs. Welspun
Steel Ltd., 264 Taxman 252 followed the ratio of the decision of the Hon’ble Gujarat High Court (supra).
As regards to the applicability of Proviso to Explanation 10 to section 43(1) which was inserted in the Statute w.e.f. 1.4.1999 by the Finance Bill (2) of 1998, the Proviso take cares of situation where such subsidy, grant or reimbursement is such nature that subsidy, grant or reimbursement cannot be directly relatable to the assets
acquired by an assessee. In such a situation, the Proviso envisages that so much of amount which bears to the total subsidy, reimbursement or grant, the proportion as such assets bears to all the assets in respect of or with reference to which subsidy or grant is so received shall be deducted in the actual cost of the asset of the assessee. Thus, the proviso envisages adjustment of subsidy in the assets of the assessee. In case the subsidy grant is not directly relatable to particular asset. Since in the preceding paras we held that the provisions of Explanation 10 to section 43(1) have no application to the facts of the present case, the question of applicability of Proviso does not arise. In the light of the above, we hold that the amount of subsidy is not to be deducted from the actual cost u/s 43(1) for the purpose of calculation of depreciation and the provisions to Explanation 10 to section 43(1) have no application to the facts of the present case. We are forfeited in taking this view by the 12 ITA.No.1156, 1157 & 1203/PUN./2023 decision of the Hon’ble Bombay High Court in the case of Welspun Steel Ltd. cited supra. This decision being that of Jurisdictional High Court is binding on us. ” Unquote.
8.1. In the case under consideration the assessee has received subsidy for the same scheme i.e IPS. The facts are identical to the facts of the above referred case. Thus, respectfully following the decision of ITAT (supra) , it is held that the subsidy shall not be reduced from the actual cost of fixed assets u/s 43(1) for the purpose of calculation of depreciation.
Thus, respectfully following the ITAT Pune Bench (supra), the AO is directed to delete the addition of depreciation.
Accordingly, Ground No.3 and 4 raised by the assessee are allowed.”
Suffice to say, the learned coordinate bench has already considered the very subsidy scheme in the foregoing detailed discussion whilst deciding the issue in assessee’s favour. We thus adopt judicial consistency to accept the assessee’s instant sole substantive ground and main appeal ITA.No.1156/PUN./2023 in very terms. Ordered accordingly.
The Revenue’s cross-appeal ITA.No.1203/PUN./ 2023 pleads the following substantive grounds :
“The Ld. CIT(A) has erred in law and on facts in holding that for the purpose of section 80-IA the year in which the 13 ITA.No.1156, 1157 & 1203/PUN./2023 assessee chooses to claim deduction has to be treated as initial assessment year.
2. The Ld.CIT(A) has erred in law and on facts in holding that profit of the eligible business has to be computed without deducting therefrom brought forward losses or unabsorbed depreciation prior to the initial year of claim de hors the provision u/s 80IA(5) of the Act.
3. The Ld.CIT(A) has erred in law and on facts m ignoring that the assessee was in power generation business and holding that each windmill has to be taken as independent eligible business.
The Ld CIT(A) has erred in law and on facts in holding that each windmill unit has to be treated as standalone basis de hors the specific stipulation in Section 80-IA(5) of the Act. that ‘profit and gains of eligible business’ being power generation business have to be taken ?”
We note in this factual backdrop that the learned NFAC’s detailed discussion has followed the tribunal’s order(s) in assessee’s case itself in preceding assessment years 2008- 2009 and 2009-2010 as under :
“4.1. Ground No.1 relates to disallowance of Claim u/s.80-IA of Rs.3,60,83,614/-. In this case, the appellant has claimed deduction of Rs.3,60,83,614/- u/s 80IA(4)(iv)(a) of the Act. The AO has emphasized on the 14 ITA.No.1156, 1157 & 1203/PUN./2023 provisions of sec 80IA(5) of the Act. In this regard, the AO has noted that the deductions claimed by the appellant is disallowed in respect of wind mill units as there was no profit in AY 2014-15 after accounting for the earlier years depreciation and losses. The appellant has contended that once the assessee chooses initial year for claim of deduction u/s 80IA, notionally brought forward losses and set-off of earlier year’s losses cannot be set off against current years eligible unit’s profits. The losses which have already set-off are to be ignored. The appellant has contended that the AO has notionally brought forward the losses which were incurred and set off before the initial year and disallowed the claim.
On perusal of the written submissions furnished by the appellant, it is observed that the this issue is squarely covered in favour of the appellant in its own case decided by Pune ITAT and CIT(A) in their orders of previous assessment years. The Hon’ble ITAT Pune Bench vide its Order no.1743/PN/2012 of AY 2008-09 and 2009-10 has held in its decision on this issue in favour of the appellant.
The extract of the relevant para is reproduced herewith :-
“9.2. After going through the rival submissions and material on record, we find that as per sec.80IA(2) of the IT. Act, the assessee has option to 15 ITA.No.1156, 1157 & 1203/PUN./2023 exercise the choosing of initial assessment year out of fifteen years beginning with the year in which the undertaking starts production. The Assessing Officer was not correct in asserting that there was no option to the Assessing Officer to exercise option in choosing the initial assessment year. As regards the issue of losses and unabsorbed deprecation of the undertaking already adjusted against the other income it was found that the same is covered by the decision of Pune Tribunal in case of Poonawala
Finvest (supra) in favour of the assessee. The Assessing Officer has relied upon Special Bench decision of Ahmedabad Tribunal In the case of Goldmine Shares & Finance (P.) Ltd. (supra).
However, the same could not be followed in view of the Hon'ble Madras High Court judgment in case of Velayudhaswamy Spinning Mills (P) Ltd. v. Asstt. CIT
[2012] 21 taxmann.com 95/340 ITR 477. ITAT,
Bangalore Bench in the case of Anil H Lad v. Dy.CIT
[2012] 25 taxmann.com 454 (Bang.-Trib) did not follow the Special Bench decision of the Ahmedabad
Bench Tribunal in view of above judgment of Madras
High Court. Relevant portion of the order is reproduced for the sake of clarity:
16 ITA.No.1156, 1157 & 1203/PUN./2023 "From reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to initial assessment year and every subsequent assessment years. When the assessee exercise option, the only losses of the years beginning from initial A. Y. alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward to a period of ten years from the initial assessment is contemplated. It does net allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. Fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created."
17 ITA.No.1156, 1157 & 1203/PUN./2023 27. Thus, the Hon'ble Madras High Court has clearly held that where the depreciation and loss of earlier assessment years have already been set off against other business income of those assessment years, there is no need for notionally carrying forward and setting off of the same depreciation and loss in computing the quantum of deduction available u/s.80l. The Hon'ble Court has held further that the year of commencement alone need not be the 'initial year', but depending upon the facts of the case and the option exercised by the assessee, the year of claim also can be considered as "initial assessment year". The court has also examined the issue from a different legal angle and held that the proposition argued by the Revenue is not compatible with the scheme of gross total income conceptualized in the IT Act especially in the light of section 80AB which are all relevant while considering the deduction u/s.80IA which is falling under Chapter VIA of the I.T. Act,
1961. Where the earlier depreciation and losses have already been set off, those loss and depreciation do not go to reduce the gross total
18 ITA.No.1156, 1157 & 1203/PUN./2023 income of an assessee within the meaning of sec. 80AB and therefore, bringing the notional concept of carrying forward and set off will be contrary to the scheme of sec. 80AB and concept of gross total income.
Now, it is clear as we find that this issue is squarely covered by the above
discussed judgement of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills P. Ltd. v. AC IT (38 DTR 57).
Where such an overriding judgement of the constitutional court is governing the issue, we are not permitted to rely on the decision of the Special Bench of the Ahmedabad Tribunal.
Therefore, following the above
judgement of the Hon'ble High Court of Madras, we accept the contention of the assessee and reverse the order of the Commissioner of Income-tax(A) on this point an direct the Assessing authority to grant deduction to the assessee u/s. 801 A for the quantum claimed by the assessee without diluting the same by the notional deduction of earlier loss and depreciation.'
19 ITA.No.1156, 1157 & 1203/PUN./2023 9.3. In view of above, the CIT(A) was justified in directing the Assessing Officer to allow the deduction u/s.80IA(4)(iv)(a) of the Act without deducting brought forward loss or unabsorbed depreciation prior to initial year on notional basis. This reasoned factual and legal finding of CIT(A) needs no interference from our side. We uphold the same.
9.4. As a result, the appeal filed by the Revenue is dismissed.
10. A similar issue came up in Revenue's appeal In assessee's own case in ITA.No.2041/PN/2012 for A.Y. 2009-10. Facts being similar, so following the same reasoning, we uphold the order of CIT(A) on this issue.”
Respectfully following the decision of the jurisdictional ITAT in appellant’s own case on identical issue, I hold that the appellant is entitled for deduction u/s.80IA(4)(iv)(a) of the Act. Therefore, AO is directed to delete the disallowance made u/s 80IA(4)(iv)(a) of the Act.
Thus, the ground of appeal number-1 is allowed.”
The Revenue is equally indeed fair enough in not pinpointing any distinction on facts in all these assessment years so far as the instant issue of sec.80IA deduction is concerned. We thus adopt judicial consistency to affirm the 20 ITA.No.1156, 1157 & 1203/PUN./2023 learned NFAC’s findings under challenge. The Revenue fails in it’s instant cross-appeal ITA.No.1203/PUN./2023 in very terms.
This leaves us with assessee’s latter appeal ITA.No.1157/PUN./2023 for assessment year 2018-2019 wherein it has filed it’s letter seeking to withdraw the same as under :
Learned DR has no objection.
We, therefore, dismiss the appeal of the assessee ITA.No.1157/PUN./2023 as withdrawn in above terms.
Ordered accordingly.
21 ITA.No.1156, 1157 & 1203/PUN./2023 12. To sum-up, the assessee’s former appeal ITA.No.1156/PUN./2023 for assessment year 2014-2015 is allowed and Revenue’s cross-appeal ITA.No.1203/PUN./2023 is dismissed and the assessee’s latter appeal ITA.No.1157/ PUN./2023 for the assessment year 2018-2019 is dismissed as withdrawn in above terms. A copy of this common order be placed in the respective case files.
Order pronounced in the open Court on 14.05.2024.