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Income Tax Appellate Tribunal, BENCH “D”, KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
This is an appeal by the assessee directed against the order dated 27.03.2012 of CIT- I, Kolkata passed u/s 263 of the Act relating to A.Y.2007-08.
The Assessee is a company engaged in the business of manufacture, sale and export of jute. For A.Y.2007-08 the assessee filed return of income declaring total income of Rs.2,87,56,904/-. In the course of assessment proceedings, the AO issued notice u/s 142(1) of the Act dated 20.07.2009 calling upon the assessee to furnish explanation with regard to matters set out in a questionnaires annexed to the said notice. In this appeal we are concerned only with the following questionnaire raised by the AO in the course of assessment proceedings :- “9 (a) Please refer 13(b) of the TAR Subsidy received Rs.,2708125/- of which Rs.1988215/- was considered in Depreciation schedule of the TAR. Please explain the difference. (b) In ref. to 13(e) of the TAR, capital subsidy receivable Rs.1.5 crore was credited to Capital reserve a/c Interest subsidy of Rs.15003609/- was credited in the P&L a/c. Another subsidy of Rs.720000/- was received from Ministry of Textile, Govt. of India. Again as per point no.2 of Notes forming part of Return Income, subsidies were Rs.2016226/- and Rs.12987383/- under Tuff Scheme and WBIS scheme respectively.
Gloster Limited A.Yr.2007-08 Please submit a reconciled statement taking also into account subsidy mentioned in 13(b) of the TAR. (c) All the above subsidies are claimed as capital receipts. Please submit copies of following documents :- i) Copies of the related scheme. ii) Copies of claim form along with all attachments. iii) Copies of subsidy release orders issued by the Authorities.”
2.1. The assessee vide its reply dated 15.12.2009 submitted as follows with regard to the subsidy of Rs.1.5 crore received by the assessee under the West Bengal Incentive Scheme 2000 (State Capital Investments Subsidy) “1.3. State Capital Investment Subsidy under WBIS, 2000 - 1.3.1 During the previous year relevant to the assessment year under consideration the assessee was eligible to receive state capital investment subsidy of Rs. 1,50,00,000/- under the West Bengal Incentive Scheme, 2000. In the audited accounts the said subsidy has been shown under the head 'Capital Reserve' in Schedule 2 (Reserves and Surplus). In this regard copy of the West Bengal Incentive Scheme, 2000 and relevant extracts of the audited accounts is enclosed as Annexure - 7 and Annexure - 8 respectively. 1.3.2 On perusal of the West Bengal Incentive Scheme, 2000 it could be seen that the factory of the assessee falls under Croup-B area. As per Para No. 8 at Page No. 9 of the scheme it could be seen that the assessee will be entitled to State Capital Investment Subsidy of @ 15% of the Fixed Capital Investment subject to a limit of Rs. 150 Lacs. 1.3.3 In this regard, copy of the claim application form submitted by the assessee and sanction letter issued by the West Bengal Industrial Development Corporation Ltd. is enclosed as Annexure - 9 and Annexure -10 respectively. 1.3.4 At this juncture it is worthwhile to refer the Explanation 10 and proviso under section 43(1) of the LT. Act, 1961 which have material bearing on the issue under consideration:- “Explanation 10.-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: Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.” 1.3.5 From perusal of above, it can be inferred that in case cost of asset has been directly or indirectly met by any form of subsidy then the subsidy amount should be reduced
Gloster Limited A.Yr.2007-08 from the cost of Asset. Plain reading of the above provisions leave no doubt in the mind that the above Explanation shall be applicable only in the following circumstances:- - in case of direct payment to the vendor by the Central Government, etc., - in case the scheme provides for claim for reimbursement of cost to the vendor or the purchaser. 1.3.6 In the assessee case, subsidy is mainly granted for the purpose of inducing the industry to set up units in certain selected backward areas and not for the purpose of meeting a portion of the cost of the assets. The total amount of subsidy to be granted though has been quantified on the basis of specified percentage of the fixed capital cost, is nothing but a measure adopted under the scheme to quantify the financial aid to be granted over a certain period. 1.3.7. The above view is fortified by the decision of Hon’ble Visakhapatnam Tribunal in the case of Sasisri Extractions Ltd –vs.- ACIT (2008) 207 ITR 127 (Visakhapatnam) (Tri.) wherein it has been held that where the assessee received subsidy from the Govt. for acceleration of industrial development in the state with the incentive itself being available for setting up of industry in Andhra Pradesh and not specifically with the view to subsidize the cost of capital, such subsidy cannot fall within Explanaiton 10 to Sec 43(1), so as to reduce actual cost.” 2.2. The AO completed the assessment u/s 143(3) of the Act in which the AO has not brought the incentive of Rs.1.5 crores to tax as revenue subsidy. AO had also not reduced the value of the subsidy from the value of fixed assets on which depreciation has to be allowed. The AO passed the order on 16.12.2009 u/s 143(3) of the Act.
The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the reason that the AO while framing the assessment order failed to consider the applicability of Explanation 10 to section 43(1) of the Act. In the opinion of CIT the subsidy should have been reduced from the value of plant and machinery for the purpose of allowing depreciation as per Explanation 10 to section 43(1) of the Act. Accordingly, the CIT issued show cause notice u/s 263 of the Act.
In reply to the show cause notice the assessee pointed out that a specific query was raised by the AO with regard to the taxability of the subsidy as revenue subsidy. The assessee also pointed out that in reply to the query of the AO in this regard the assessee sent a reply pointing out as to how the value of the subsidy need not be reduced from the value of plant and machinery for the purpose of allowing depreciation in view of the provision of Explanation 10 to section 43(1) of the Act.
Gloster Limited A.Yr.2007-08 The Assessee thus took a stand that the AO has applied his mind to the issue in question and came to a particular conclusion, which conclusion cannot be said to be unsustainable in law. Therefore the CIT in exercise of his powers u/s 263 of the Act cannot substitute his view with the view of AO. The assessee submitted that since proper and adequate enquiry has been made opposing the action of CIT u/.s 263 of the Act should be dropped.
4.1. CIT, however, did not agree with the aforesaid submissions made by the assessee. According to CIT in the questionnaire issued by the AO along with the notice u/s 142(1) of the Act dated 20.07.2009 there was no specific query with regard to the applicability to Explanation 10 to section 43(1) of the Act and it was only a general question about whether the subsidy in question is a capital subsidy not chargeable to tax and revenue subsidy chargeable to tax. CIT was of the view that AO has not examined or considered the question of reducing the value of subsidy from the cost of plant and machinery for the purpose of depreciation. The CIT therefore concluded that the order of AO was erroneous and prejudicial to the interest of revenue. CIT also observed that since the subsidy in question was to establish or expand industry in a backward and in other area and since the subsidy is related to capital assets in the sense that it is intended to compensate for acquiring assets, the effect of the subsidy is therefore reimbursement wholly and partly of the amount spent in acquiring plant and machinery. Therefore Explanation 10 to section 43(1) of the Act would be attracted. Though the CIT made the aforesaid observations by way of a passing a reference, the aforesaid observations were not rendered in the form of a finding to come to a conclusion that the order of AO was erroneous and prejudicial to the interest of the revenue. This is because the CIT after making the aforesaid observations has observed that the matter requires re-examination to verify the utilisation of the fund and to see whether in plant and machinery was purchased out of this subsidy directly or indirectly. The CIT finally gave a direction to the AO to pass a fresh assessment order after reducing the value of the assets to the extent of subsidy amounting to Rs.1.5 crores for the purpose of allowing depreciation.
Gloster Limited A.Yr.2007-08 5. Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal.
We have heard the submissions of the learned counsel for the assessee and the learned DR. The learned counsel for the assessee reiterated the submissions as were made before CIT. It was further submitted by him that the incentive in question was for providing fiscal support for the promotion of industries in the state and not for meeting the cost of acquiring any fixed assets. The fact that the subsidy was on the basis of specified percentage of fixed capital cost cannot lead to a conclusion that the subsidy in question was granted for the purpose of acquiring fixed assets. It was therefore submitted by him that subsidy in question need not be reduced from the value of fixed assets under Explanation 10 to section 43(1) of the Act. Our attention was drawn to the decision of ITAT Kolkata Bench in the case of DCIT vs Rasoi Ltd. In dated 02.04.2014 wherein an identical scheme of the State of West Bengal namely Incentive Scheme 1999 was considered by this Tribunal and it was held that the subsidy received therein was not for the purpose of acquiring any fixed asset and therefore value of the subsidy need not be reduced from the cost of the fixed assets for the purpose of allowing depreciation. In other words, it was held that Explanation 10 to section 43(1) of the Act will not be applicable. The learned DR placed strong reliance on the order of the CIT.
We have given a careful consideration to the rival submissions. It is clear from the order passed by AO u/s 143(3) of the Act and enquiry made by the AO before passing such order that the AO went in to the question as to whether the subsidy received by the assessee under the West Bengal Incentive Scheme 2000 was capital or revenue subsidy. Though the AO had not raise any specific query as to whether the subsidy in question has to be reduced from the value of fixed assets for the purpose of allowing depreciation invoking the provisions of Explanation 10 to section 43(1) of the Act. The assesse in its reply to the notice u/s 142(1) of the Act has clearly set out that the subsidy in question need not be reduced from the value of fixed assets. We have extracted the reply of the assessee in the earlier part of this order. Therefore the Gloster Limited A.Yr.2007-08 CIT in exercising his powers u/s 263 of the Act cannot come to a conclusion that there is a failure on the part of the AO to have made proper and adequate enquiry with regard to applicability of Explanation 10 to section 43(1) of the Act to the subsidy received by the assessee.
As far as the merits of the order u/s 263 of the Act, the question is as to whether the subsidy in question can be said to the payment to meet any portion of the actual cost of fixed assets. It is only in such an event that Explanation 10 to section 43(1) of the Act can be invoked by the AO. Similar issue had come for consideration before this Tribunal in the case of DCIT vs Rasoi Ltd (supra). This Tribunal has held as follows :- “6. From the above facts and circumstances, admitted facts are that during the year under consideration assessee company received incentive subsidy from Govt. of West Bengal under West Bengal Incentive Scheme, 1999 (WBIS) as encouragement for setting up of industrial project. It is also a fact that maximum limit of the subsidy was restricted with reference to the value of fixed capital investments in land, building, plant and machinery but no part of the subsidy was specifically intended to subsidize the cost of any fixed asset, therefore, it cannot be said that the subsidy was to meet a portion of cost of the asset. According to us, the assessee has rightly not reduced the amount of subsidy received from the actual cost/WDV of the fixed assets while claiming depreciation. It is also a fact that revenue during scrutiny assessments of the assessee for AY 2003-04 and 2004-05, the above stated subsidy was considered as capital receipt accepting the contention of the assessee. For the sake of consistency also the AO should not have changed the stand now. Even Hon'ble Supreme Court in the case of CIT vs. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) has considered this issue and held that 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. Therefore, the said amount of subsidy cannot be deducted from the actual cost under sec. 43(1) for the purpose allowing depreciation. It is further held that if Government subsidy is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as a percentage of such cost, it does not partake the character of payment intended either directly or indirectly to meet the "actual cost". By implication, the above judgment also provides that if the subsidy is intended for meeting a portion of the cost of the assets, then such subsidy should be deducted from the actual cost, for the purpose of computing depreciation. As per Hon'ble Supreme Court, law is that if the subsidy is asset- specific, such subsidy goes to reduce the actual cost. If the subsidy is to encourage setting up of the industry, it does not go to reduce the actual cost, even though the amount of subsidy was quantified on the basis of the percentage of the total investment made by the assessee.
Gloster Limited A.Yr.2007-08 7. The law is already settled on the subject. Now, the only wavering is with reference to Explanation 10 provided under sec.43(l). The said Explanation provides that 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. It is further, provided there under, that where such subsidy or grant or reimbursement of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee, In order to invoke Explanation 10, it is necessary to show that the subsidy was directly or indirectly used for acquiring an asset. This is again a question of fact. The relatable subsidy to such asset can be reduced from the cost only if it is found that the cost for acquiring that asset was directly or indirectly met out of the subsidy, Likewise in the proviso, it is necessary to show that the subsidy has been directly or indirectly used to acquire an asset but it is not possible to exactly quantify the amount directly or indirectly used for acquiring the asset. Here also, a finding of fact is necessary that an asset was acquired by directly or indirectly using the subsidy. The above Explanation and the proviso thereto do not dilute the finding of the Hon'ble Supreme Court in the case of P. J, Chemicals Ltd. that asset-wise subsidy alone can be reduced from the actual cost. The above Explanation and the proviso therein attempt to explain the law, They are not bringing any new law different from the law considered by the Horn’ble Supreme Court in the above cases.
8. In view of the above facts and circumstances of the case and legal position explained by Hon'ble Supreme Court in the case of P. J. Chemicals Ltd. supra, we are of the view that CIT(A) has rightly allowed the claim of depreciation of assessee, We uphold the same. This issue of revenue's appeal is dismissed, 8.1. The aforesaid decision was rendered in the context of West Bengal Incentive Scheme 1999. In the present appeal we are concerned with West Bengal Incentive Scheme 2000. This scheme is identical to the West Bengal Incentive Scheme 1999. This would be clear from the foreword to the West Bengal Incentive Scheme 2000 which reads thus :- “West Bengal Incentive Scheme 1999 Scheme had an attractive provision of Sales Tax related by way of “remission “ of “deferment “. But in pursuance of the National Policy, the State Govt. had to discontinue the Sales Tax related Incentives from 1st January, 2000. However, as there is a strong need for fiscal support for the promotion of industry in the State, the State Govt. decided to introduce the West Bengal Incentive Scheme, 2000 with different and new features, quite attractive for industries in large, medium, small scale and tourism sectors.”
Gloster Limited A.Yr.2007-08 8.2. We are of the view that in the light of the above discussion it cannot be said that the incentive in question was granted to meet any portion of the actual cost of fixed assets and the same is not required to be excluded from the cost of fixed assets on which the depreciation is to be allowed. We also find force in the submissions of learned counsel for the assessee that AO has taken one of the possible view and at best it would be a case where the CIT in exercising his powers u/s 263 of the Act wants to substitute his view with that of the view by the AO. Such a course is not permissible in the proceedings u/s 263 of the Act. For the reasons given above, we quash the order u/s 263 of the Act and allow the appeal of the assessee.
In the result the appeal of assessee is allowed.
Order pronounced in the court on 15.1.2016.