TMI Blog2014 (12) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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, amount of subsidy cannot be deducted from the actual cost u/s 43(1) for the purpose allowing depreciation - 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 thus, the subsidy receipt should not be reduced from the actual cost of fixed assets for computing depreciation under the provisions of the Act decided in favour of assessee. Allowance of balance 50% additional depreciation u/s 32(1)(iia) Whether the assessee is entitled for the balance 50% additional depreciation in view of sec. 32(1)(iia) of the Act in the next assessment year for remaining unutilized additional depreciation - Held that:- The assessee has purchased and installed new plant and machinery for its manufacturing unit and put to use for a period of less than i.e. 180 days, during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(1) of the Act, the AO may be directed to reduce the amount of subsidy in determining the actual cost of the fixed assets for depreciation allowance the AO is directed to reduce the amount of subsidy in determining the actual cost of the fixed assets for depreciation allowance Decided in favour of assessee. Estimation of disallowance u/s.14A Held that:- The AO during assessment proceedings noted the fact that assessee earned dividend of ₹ 1,34,79,846/- claimed as exempt u/s.10(34) of the Act and dividend of ₹ 10,86,28,149/- claimed as exempt u/s. 10(35) of the Act - in respect of these exempt incomes the assessee did not make any disallowance u/s14A in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] it has been held that Rule 8D is prospective and not retrospective, the same cannot be applied to the year under consideration i.e. AY 2007-08 - Even otherwise the AO has not given any finding with respect to the nexus of this expenditure with that of the exempted income and has not pointed out to any expenditure, whatsoever, which is relatable to the exempted income - no disallowance at all should be made Decided in favour of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x subsidy under a scheme of the Rajasthan Government. The assessee claimed that an amount of ₹ 12.38 lakhs was related to sales tax exemption granted by the State Government and therefore, being a capital receipt it should be excluded from sales for computing total income under the Act. The AO noted that normally for the units which do not enjoy such exemption the assessee reduces the sales tax component from sales and credits only such net of tax figure in the profit loss account under sales account. But assessee explained that as per industry norms the billing is always made on FOR basis, which is inclusive of all taxes. In assessee s case they work out the sales tax component by back calculation method and credit gross sales figure as per billing in the account and claim the benefit of deduction in the computation of income directly without disclosing it as such in accounts. But AO was of the opinion that since the sales tax exemption was related to sales and was not specifically earmarked to purchase of any capital assets such subsidy should be treated as a revenue receipt. He also find that the assessee did not capitalize it either in the balance-sheet by creating a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursement (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. Now if we consider the nature of the above mentioned Sales Tax subsidy9 of ₹ 12,38,000/- it can be seen that this subsidy has been received by the assessee company in respect of the capital expenditure made for the expansion carried out in its factory. As per the eligibility certificate for this Sales Tax Exemption Scheme of 1998, the Eligible Fixed Capital Investment for expansion carried out by the assessee comes to ₹ 3082.51 lacs. There is a direct link between the cost of fixed assets eligible under this exemption scheme and the subsidy a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggrieved, both revenue and assessee, came in second appeal before Tribunal. 5. Before us Ld. Senior Advocate Shri J P Khaitan on behalf of assessee argued that the sales tax incentive received by the assessee-company relates to its unit for expansion, which was completed on 31-01-2001 and same is covered under Rajasthan Sales Tax Exemption Scheme, 1978 under Rajasthan Sales Tax and Central Sales Tax Act. He argued that overall limit of exemption is linked is fixed to capital investment and is in the nature for subsidy for setting up of new unit / expansion of existing unit. He stated the fact that for determining the Sales Tax amount eligible for exemption, a back calculation is made from the gross amount built to the party and thus, in effect, the exemption amount is derived from the sales value. According to him, the subsidy received is in the nature of capital receipt and thus it should be excluded while computing the total income of the company. Ld. counsel for the assessee drew our attention the eligibility certificate wherein the quantum of exemption from year to year is prescribed. Ld. counsel for the assessee drew our attention to eligibility certificate, wherein claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to our notice by the Revenue that the matter has been decided by Hon'ble Calcutta High Court, despite a query from the Bench. In such circumstances, and taking a consistent view, we hold that the CIT(A) has rightly treated the sales tax subsidy receipt as capital in nature . 8. In respect to the issue of application of Explantion-10 to Sec.43(1) of the Act we find from the facts of the case that the Rajasthan Govt. has framed a incentive scheme i.e., R.S.T/C.S.T. Exemptions Scheme 1998 for encouragement of setting up of industrial project or expansion of existing industrial projects. It is also a fact that the maximum limit of the subsidy was restricted with reference to the value of fixed capital investment in land, building, plant machinery but no part of the subsidiary was specifically intended to subsidized the cost of the any fixed assets, therefore, it cannot be said that subsidy was to meet a portion of cost of asset. According to us, 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 AYs 2002-03 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.(supra) that asset-wise subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly the claim for further depreciation to the extent of ₹ 13,39,63,209/- pertaining to additions made during Assessment Year 2006-07 and used for period of less than 180 days is not accepted. Aggrieved, assessee preferred appeal before CIT(A). 12. The CIT(A) confirmed the action of the AO by observing in para-7.3 as under:- 7.3 I have considered the above submission of Ld. AR. The first argument of the Ld. AR is that in Clause (iia) of Sec. 32(1) as introduced by Finance Act 2002 there was a mention of the previous year in which the additional depreciation u/s 32(1)(iia) was to be allowed but in the provisions which have been made effective from 01.04.2005 there is no mention about the previous year in which such additional depreciation is to be allowed. Ld. AR has submitted that this additional / further depreciation is not similar to the normal depreciation. It is an incentive which is granted to encourage the industry and therefore if such incentive gets restricted in the first year it should be allowed in the second year. Ld.AR has contended that there is no prohibition in allowing the initial depreciation in two years. In respect of this argument, I feel that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no provision under the IT Act to allow such depreciation in the subsequent year also. In view of the above discussion I dismiss this ground of the assessee. Aggrieved, assessee is in second appeal before Tribunal. 13. Before us, Ld. senior counsel for the assessee pointed out that second proviso to section 32(1)(ii) of the Act restricts the additional depreciation to 50% in case the machinery and plant was put to use for the purpose of business or profession for a period less than 180 days. Therefore, when the plant and machinery used for less than 180 days, the assessee is entitled for 50% for the additional depreciation and remaining 50% can be claimed in subsequent year since there is no restriction to claim the additional depreciation. He further stated that it is not a case of carry forward of additional depreciation for want of sufficient profit but in fact the assessee has sufficient profit to absorb the entire depreciation for the first year in which depreciation was claimed. However, in view of second proviso to section 32(1)(ii), the AO has allowed only 50% of depreciation of the total claim. In the absence of any proviso to prohibit the assessee from claiming remaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in respect of new machinery and plant and depreciation has to be granted only in the year in which machinery was put to use. According to him, if the machinery was put to use for less than 180 days and in that case assessee is entitled only for 50% of additional depreciation and the benefit cannot be carried forward for next year for allowance in the next year. According to him, there is no provision in the Act to carry forward the allowable depreciation when the assessee has sufficient profits. According to him, the provision is very clear and therefore, in view of the proviso to section 32(1)(ii) of the Act the assessee is entitled only for 50% of depreciation and not 100%. 15. We have heard rival submissions and gone through facts and circumstances of the case. The facts are admitted and there is no dispute on the facts. Only issue for adjudication is whether the assessee is entitled for the balance 50% additional depreciation in view of sec. 32(1)(iia) of the Act in the next assessment year for remaining unutilized additional depreciation. We have gone through the relevant provisions of second proviso to section 32(1)(ii) and 32(1)(iia) of the Act. In the present case bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred on the assessee by way of incentive provision cannot be taken away by adopting an implied meaning to second proviso to section 32(1)(ii) of the Act. Since the second proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50% depreciation in the subsequent year, second proviso to section 32(1)(ii) shall not be interpreted to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. We are of the view that the assessee now is entitled for 50% additional depreciation, because in the year in which the machinery was first put to use the assessee claimed only 50% of additional depreciation for the reason that the same was put to use for less than 180 days, in this assessment year for the balance of depreciation. 16. Before us, Ld. counsel for the assessee relied on the decision of Coordinate Bench of ITAT of Cochin in the case of Apollo Tyres Ltd. Vs. ACIT in ITA No. 616/Coch/2011 for AY 2007-08 dated 20.12.2013 (unreported), wherein the Bench has decided the issue as under: 10. We have also carefully gone through the Second Proviso to section 32(1)(ii) of the Act, which reads as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut to use the assessee is entitled for 50% additional depreciation since the machinery was put to use for less than 180 days and the balance 50% shall be allowed in the next year since the eligibility of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(1)(ii) of the Act. 17. The ld. senior counsel also relied on the decision of the Delhi Bench of this Tribunal in the case of DCIT vs. Cosmo Films Ltd. 139 ITD 628 (Del) and in the case of ACIT vs. SIL Investment Ltd. 148 TTJ 213 (Del). This issue was considered by the Delhi Bench of this Tribunal in the case of Cosmo Films Ltd. (supra), wherein considering the provisions of section 32(1)(iia) and second proviso to section 32(1)(ii) of the Act found that when there is no restriction in the Act to deny the benefit of balance 50%, the assessee is entitled for the balance additional depreciation in the subsequent assessment year and observed as under: Thus, the intention was not to deny the benefit to the assessee who have acquired or installed new machinery or plant. The second proviso to section 32(1)(iia) restricts the allowances only to 50% where the asst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m raised in ground no.3. The same is dismissed. 18. In view of the above discussion and considering the orders of coordinate Benches, cited supra, we are of the considered view that the assessee is entitled for additional depreciation u/s. 32(1)(iia) of the Act in this assessment year also. We direct the AO accordingly. 19. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of the AO in treating the interest subsidy received from the state government as revenue receipt. For this, assessee has raised following ground No.3:- 3. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in not holding that interest subsidy of ₹ 20245164 received from the State Government is a capital receipt and to be excluded from total income. 20. Briefly stated facts are that the assessee-company namely Chanderia Cement Works at Rajasthan, one of the unit, received interest subsidy of ₹ 2,02,45,164/- on account of Investment Promotion Policy of Rajasthan government which was applicable to all new investments and investments made by the existing units and enterprises for modernization / expansion / diver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new unit or to expand its existing unit. The scheme required that for setting up new unit or expanding the existing unit the investment should be made by taking term loan from financial institution/scheduled banks. The loan/borrowing from the financial institution/bank should be for creation of fixed assets and not for working capital, over draft and current liabilities. On the basis of these features of the incentive scheme of Rajasthan Government Ld. AR claimed that the nature of the subsidy received under this scheme would be capital receipt in view of the decision of Hon'ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd. In this regard I am of the opinion that in the case of Ponni Sugars and Chemicals though Hon'ble Supreme Court has emphasized that for deciding the nature of any subsidy the purpose for which the subsidy is given should be the main criterion but we should understand that this emphasis on purpose of the subsidy scheme was given under the special circumstances of the case of Ponni Sugars and Chemicals. In that case the subsidy was given for setting up of new units and substantial expansion of the existing units. A minimum amount of inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant t note that this scheme has been termed as a scheme of interest subsidy. Under this scheme an assessee becomes eligible only when it borrows funds from banks/financial institutions etc. for investing in the new industry/expansion/modernization allowed under this scheme. The subsidy amount is calculated @ 5% of the funds borrowed for use in the projects allowed under this scheme. The subsidy9 is give only till the assessee pays interest on the borrowed funds. If no interest is payable then the subsidy will not be allowed to the assessee. There is a limit to which subsidy can be claimed which is decided on the basis of the Sales Tax paid in three earlier years. All these features of this scheme show that the subsidy is not given for meeting a part of the capital expenditure incurred by the assessee but for meeting part of the interest which will be payable on the loan taken for investing in the capital assets. This means that through this subsidy the Government of Rajasthan is bearing a part of the interest burden of the assessee which is a revenu9e item. Therefore, it is clear that through this subsidy a revenue expenditure of the assessee is getting reduced leading to increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsidy only for repayment of term loans taken by it for expansion of existing business and the intention of granting subsidy thereof is to assist the company to recoup part of above investment and to repay the borrowings. Ld. counsel for the assessee narrated that the loan account under the Industrial Promotion Scheme was for the setting up of captive power plant and this fact has been admitted by lower authorities. This loan from State Bank of India and State Bank of Bikaner Jaipur for a sum of ₹ 40.50 cr. was taken for the purpose of setting up of power plant in its Chanderia Cement Plant and on this assessee is paying interest @ 8% p.a. The subsidy to be given to the assessee @ 5% of the loan amount used for setting up the captive power plant and assessee has accordingly made a claim @ 5% of this loan amount which comes to ₹ 2,02,45,163/-, which has been allowed by the State Government as subsidy to the assessee under the Scheme. This setting up of Captive power plant is in the nature of expansion because the assessee is always facing acute shortage of power and to meet the power crisis this power plant was set up which is regularly producing power. In term o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idy and / or wage /employment subsidy is described as under:- The Interest Subsidy and/or Wage/Employment Subsidy sanctioned and paid under the Scheme and the exemption of luxury tax, electricity duty, mandi tax, entertainment tax, stamp duty, conversion charges and other benefits availed under the Scheme shall be subject to the following conditions. Breach of any of these conditions shall make the subsidy/exemption amount liable to be recovered as Tax or arrears of land revenue/along with interest @ 18% per annum from the date from which the subsidy was provided. We have also gone through this scheme, which was clarified by Finance Department (Tax Division) Government of Rajasthan, vide No.F.4(18) FD/Tax-Div./2001/T Dated 10-10-2003, wherein the existing clause7(i)(b) of the Raj Invest-2003 was amended in respect to expansion as under:- In case of investment made in Modernization Expansion, the amount of subsidy shall be subject to a maximum of fifty percent of the amount of the Central Sales Tax and VAT payable or deposited by the unit on its additional capacity, so created over and above the installed capacity before Expansion/Modernization. Illustration:- installed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the capitalistic intention of the grant, we have already held the subsidy in the form of sales tax as capital in nature. Even, it would be evident from the 2003 Scheme that the same was framed with a view to provide investors as attractive opportunity to invest in the State of Rajasthan. The salient features of the 2003 Scheme may be summarized as under:- (a) The 2003 Scheme was applicable to all new investments and investment made by existing units and enterprises for modernization / expansion / diversification subject to the condition that such units shall commence commercial production / operation owing to such investment during the operation period of the scheme. (b) Clause 5 of the 2003 scheme laid down the eligibility criteria. Some of such criteria were:- (i) The term loan for financial institutions / scheduled commercial banks should have been sanctioned and utilized during the operative period of the scheme. (ii) There should be a specified minimum borrowing for investment or there should be a minimum specified investment in land and/or building; (iii) Commercial production/operation should have commenced during the operative period of the scheme; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on loan for expansion of manufacturing unit of the assessee-company, we are of the view, even admitted by assessee, that in the event the contention of the assessee for treatment of the subsidy as a capital receipt is accepted, in view of the provisions of Explanation 10 to section 43(1) of the Act, the Assessing Officer may be directed to reduce the amount of subsidy in determining the actual cost of the fixed assets for depreciation allowance. We direct the AO to reduce the amount of subsidy in determining the actual cost of the fixed assets for depreciation allowance. This issue of assessee s appeal is allowed. 26. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of the AO in disallowing leave encashment u/s 43B(f) of the Act. For this, assessee has raised following ground No.4:- 4. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in not holding that provision for leave encashment of ₹ 16274391 is neither is a statutory nor contingent liability and therefore not to be considered for the purpose of computing disallowance u/s 43B(f) of IT Act, 1961. 27. At the outset, Ld. co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act and dividend of ₹ 10,86,28,149/- claimed as exempt u/s. 10(35) of the Act. He found that in respect of these exempt incomes the assessee did not make any disallowance u/s14A. The AO relied on the decision of Special Bench of ITAT Mumbai n the case of M/s Daga Capital and applied the formula given in Rule 8D(iii) and calculated disallowance u/s.14A as ₹ 1,48,84,723/- and added to the total income of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who restricted the disallowance at 1% of the exempt income. Aggrieved, both came in second appeal before tribunal. 30. We find that the AO has applied Rule 8D(iii) read with section 14A of the Act for making disallowance by relying the decision of Special Bench of ITAT, Mumbai in the case of ITO Vs. Daga Capital Market Pvt. Ltd. (2009) 312 ITR 1 (SB), Mumbai. Apart from this, the AO has not given any finding in respect to nexus of this expenditure with that of the earning of exempted income. The CIT(A) restricted the disallowance at 1% of exempted income by observing as under: On this issue I find that in the above mentioned decision of Godrej and Boyce Manufacturing Co. Hon. Bombay High Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has not filed revised return for making the claim but he has made claim by way of computation of income. After hearing both the sides, we are of the view that this issue requires adjudication because the facts are already available in the assessment records. Similar issue was referred back by this Tribunal in assessee s own case for AY 2006-07 in ITA No. 1812/K/2010 dated 29.07.2011 vide para 9.4, wherein the Tribunal exactly on similar facts and same issue has been remitted back to AO for fresh adjudication. In term of the decision in AY 2006-07 of this Tribunal, we remit the issue back to the file of the AO to decide afresh after giving reasonable opportunity of being heard to the assessee. We order accordingly. 33. Ground no. 1 of revenue s appeal is against the order of CIT(A) deleting the disallowance made by AO on account of claim of deduction of proportionate amount of leasehold land written off of ₹ 21,78,088/-. For this, revenue has raised following ground no.1: 1. That Ld. CIT(A)-VI, Kolkata has erred in law as well as on facts by deleting the disallowance made by AO on account of claim of deduction of proportionate amount of leasehold land written off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and gone through facts and circumstances of the case. We find that this issue has been decided by the tribunal in assessee s own case in ITA No.1936/K/2010 for AY 2006-07 dated 29.07.2001 against the revenue and in favour of assessee. The Tribunal vide para 23 of its order has held as under: 23. We have heard the parties and perused the material placed on record. Section 43(6) (i)(B) specifically requires the reduction of the written down value of the block of assets by the moneys payable in respect of any asset falling within that block which is sold during the previous year. We find that the ld. CIT(A) discussed the facts and legal position in this regard by observing as under:- I have gone through the submissions of the appellant and also the order of the AO. The accounting treatment cannot effect the operation of the statutory provisions contained in section 43(6) of the Act. The ld. AR argued that for accounting purpose as per accounting standard 10 some assets were transferred from heading of fixed assets to a separate heading other current assets with a description fixed assets held for disposal . However for income tax purposes the block of assets concep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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