2013 (7) TMI 956 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of depreciation on plant and machinery received as a grant/subsidy from National Dairy Development Board (NDDB).
2. Application of Explanation 10 to section 43(1) of the Income Tax Act to assets acquired and grants received prior to 1-4-1999.
3. Relevance of the Supreme Court decision in Saharanpur Electric Supply Co. Ltd. to the facts of the case.
4. Deductibility of subsidy from the actual cost u/s 43(1) for depreciation purposes.

Summary:

Issue 1: Disallowance of Depreciation on Grant/Subsidy

The Assessee, a company incorporated u/s 25 of the Companies Act, 1956, engaged in milk processing and marketing, claimed depreciation on plant and machinery received as a grant/subsidy from NDDB. The Assessing Officer disallowed the claim, stating that no capital asset was transferred to the Assessee by NDDB. The CIT(A) upheld the disallowance, confirming that the grant portion should be deducted from the actual cost of assets for depreciation purposes.

Issue 2: Application of Explanation 10 to Section 43(1)

The Assessee argued that Explanation 10 to section 43(1) should not apply to assets acquired and grants received prior to 1-4-1999. However, CIT(A) held that Explanation 10, effective from 1-4-1999, applies irrespective of the year of acquisition of assets or the year of disbursement of the grant. The Tribunal agreed, stating that the cost relatable to the subsidy should not be included in the actual cost of the asset from AY 1999-2000 onwards.

Issue 3: Relevance of Supreme Court Decision in Saharanpur Electric Supply Co. Ltd.

The CIT(A) relied on the Supreme Court decision in Saharanpur Electric Supply Co. Ltd., which the Assessee contended was not applicable. The Tribunal found the decision relevant, noting that it supports the principle that the actual cost of assets can be altered in later years for depreciation purposes.

Issue 4: Deductibility of Subsidy from Actual Cost u/s 43(1)

The Assessee claimed that the subsidy should not be deducted from the actual cost of assets u/s 43(1). However, CIT(A) and the Tribunal held that even prior to the insertion of Explanation 10, subsidies received for specific purposes of meeting a portion of the cost of assets were to be deducted from the actual cost for depreciation purposes, as per CBDT Circular No. 190 dated 1.3.1976.

Conclusion:

The Tribunal dismissed the Assessee's appeal, upholding the CIT(A)'s order that the grant portion should be deducted from the actual cost of assets for depreciation purposes, in line with Explanation 10 to section 43(1) and relevant judicial precedents. The appeal was pronounced dismissed in open court on 12-07-2013.