2017 (4) TMI 461 - AT - Income Tax

Disallowance of depreciation - reducing the incentives received from Maharashtra State Government from the cost of the building and plant and machinery and further by enhancing the income by holding that subsidiary receipt from Maharashtra Government for putting a mega project in backward area is Revenue receipt liable to tax - Held that - The assessee has set up a manufacturing unit in notified low human development district Jalana. The assessee has been granted eligibility certificate under PSI-227 No. DI/PSI-2007/Mega Project/Ec08/2009/B-401 dated 03-01-2009 on specific criteria that the assessee shall employ 250 employees and at least 75% of same should be local persons. Accordingly the assessee on complying all conditions of scheme has received Industrial promotion Subsidy (Capital Incentive) from Govt. of Maharashtra under PSI-2007 Scheme. The same was claimed to be capital receipt and credited to capital reserve account by the assessee. We find that in the present case the cost of the asset is incurred and paid by the assessee and not met by the Government in form of subsidy. The method of quantification i.e. the maximum subsidy limit is the only linked with cost of fixed assets. This quantification is for putting cap on maximum amount of subsidy eligibility. This method of quantification does not mean in any way that subsidy is given to offset cost of asset. It is very clear from PSI scheme as well as Eligibility certificate that subsidy is given to generate local employment in low human index district and receipt is in not for meeting or subsidizing cost of asset by Govt. It is only where subsidy is given specifically to offset the cost of an asset such payment would fall within the expression met whereas the subsidy received merely to accelerate the industrial development of the state cannot be considered as payments made specifically to meet a portion of the cost of the asset. Therefore incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it falls outside the ambit of Explanation 10 to Section 43(1) of the Act. In the light of the above discussion for the purpose of computing depreciation allowable to the assessee the subsidy amount cannot be reduced from the cost of the capital asset. Accordingly on both the issues we are of the view that the subsidy received by the assessee is capital in nature and it cannot be reduced from the cost of the fixed assets for computing depreciation. Accordingly this inter-connected issue of assessee s appeal is allowed. Disallowing advertising and sales promotion expenses on adhoc basis - Held that - In view of the above details given by the assessee and the fact that the AO has estimated the disallowance on adhoc basis we are of the view that a reasonable disallowance of Rs. 5 lakhs will meet the end of justice to which the learned Counsel for the assessee is also agreed. Accordingly we allow this issue of assessee partly.

Summary

Issues Involved:
1. Disallowance of depreciation by reducing the incentives received from the Maharashtra State Government from the cost of the building and plant and machinery.
2. Enhancement of income by treating the subsidy received from the Maharashtra Government as revenue receipt.
3. Disallowance of advertising and sales promotion expenses on an ad hoc basis.

Detailed Analysis:

1. Disallowance of Depreciation:
The assessee, a Private Limited Company engaged in manufacturing steel, received a subsidy from the Maharashtra State Government under the Package Scheme of Incentives, 2007. The subsidy was intended to encourage industrial dispersal to less developed areas. The Assessing Officer (AO) disallowed the depreciation claimed by the assessee by reducing the subsidy amount from the cost of the building and plant and machinery, citing Section 43(1) Explanation 10 of the Income Tax Act, 1961. The AO viewed the subsidy as deductible from the actual cost of the assets. The CIT(A) upheld this view, treating the subsidy as a capital receipt but reducing it from the asset's cost while computing depreciation.

2. Enhancement of Income:
The CIT(A) further enhanced the income by treating the entire subsidy received as a revenue receipt, thereby making it fully taxable in the year of receipt. The CIT(A) distinguished the assessee's case from other cases like Reliance Industries Ltd., Harinagar Sugar Mills Ltd., Rasoi Ltd., Shree Cement Ltd., and Indo Rama Synthetics (I) Ltd., stating that the primary purpose of the subsidy in the assessee's case was to generate employment rather than to fund the setting up of the industry. The CIT(A) relied on the Supreme Court's decision in Ponni Sugars & Chemicals Ltd. and Sahney Steel & Press Works Ltd., which emphasized the purpose test to determine the nature of the subsidy.

3. Disallowance of Advertising and Sales Promotion Expenses:
The AO disallowed 20% of the advertising and sales promotion expenses on an ad hoc basis, amounting to Rs. 19,42,224, due to the non-verifiability of the expenses and the high probability of excessive expenditure being debited to show lower taxable income. The CIT(A) remanded the matter back to the AO for verification of facts. The Tribunal, upon reviewing the details provided by the assessee, noted that most expenses were paid by cheque and were supported by bills, with TDS deducted where applicable. Considering the total turnover and expenses, the Tribunal deemed a reasonable disallowance of Rs. 5 lakhs to be justifiable.

Tribunal's Conclusion:
The Tribunal concluded that the subsidy received by the assessee under the Package Scheme of Incentives, 2007, was capital in nature, intended for industrial development in the state's backward areas, and not for meeting the cost of assets. Therefore, the subsidy should not be reduced from the cost of the assets for computing depreciation. The Tribunal relied on the Bombay High Court's decision in Reliance Industries Ltd. and the Supreme Court's decision in Ponni Sugars & Chemicals Ltd. The Tribunal allowed the assessee's appeal on this issue.

Regarding the disallowance of advertising and sales promotion expenses, the Tribunal found the AO's ad hoc disallowance to be excessive and reduced it to Rs. 5 lakhs, which was agreed upon by the assessee's counsel.

Final Order:
The appeal of the assessee was partly allowed, with the subsidy being treated as a capital receipt and the disallowance of advertising and sales promotion expenses being reduced to Rs. 5 lakhs.