2010 (10) TMI 1089 - AT - Income Tax

Chargeability to income-tax on Subsidy received under Package Scheme of Incentives 1993 from State Government - credited to Capital Reserve A/c - nature of receipt - revenue or capital receipt - A.O was of the view that as per Explanation-10 to Section 43(1), any subsidy received from the Government is required to be reduced from the actual cost of the assets for the purpose of depreciation under the Income Tax Act 1961 - A.O was not satisfied with the explanation of the assessee and finally concluded that the subsidy should be excluded from the cost of the assets for the depreciation and made an addition after re-working the same - CIT(A) upheld the action of the A.O. HELD THAT - An identical issue was raised under similar material facts in the case of M/s. Sapna Re-rolling Industries v. ITO wherein following the decision of the Tribunal in the case of Sasisri Extractions Ltd. v. ACIT, 2008 (1) TMI 485 - ITAT VISAKHAPATNAM , held that; A careful perusal of Target 2000 scheme shows that the scheme was intended to accelerate industrial development of the State and the incentive was given for setting up of determining the amount of subsidy to be given the cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital. Under the circumstances, we are of the view that the incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost of thus falls outside the ken of Explanation 10 to section 43(1). Therefore, we are of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the actual cost of the capital asset. AO is directed accordingly. We, thus, following the decision, set aside orders of the lower authorities on the issue with direction to the A.O to decide the issue in view of the above cited decision. Ground is, accordingly, allowed in favour of the assessee.

Summary

Issues:
1. Treatment of subsidy received by the assessee in setting up a unit in relation to the cost of assets for depreciation under the Income Tax Act 1961.

Analysis:
The appeal in this case concerns the treatment of a subsidy received by the assessee for setting up a unit in relation to the cost of assets for depreciation under the Income Tax Act 1961. The Ld CIT(A) held that the subsidy received should be reduced from the cost of assets, a decision challenged by the assessee. The key contention revolved around the applicability of Explanation-10 to Section 43(1) of the Act, which mandates the reduction of any subsidy received from the government from the actual cost of assets for depreciation purposes.

The Ld A.R. for the appellant cited precedents, including the decision of the Pune Bench in the case of M/s. Sapna Re-rolling Industries V/s. ITO, where it was established that adjustments for subsidies in question should not be made for depreciation purposes. Additionally, references were made to various decisions such as CIT V/s. P.J. Chemicals Ltd., Sahaney Steel and Press Work Ltd. V/s. CIT, CIT V/s. K.C.A. Ltd., CIT V/s. Sterlite Chemical, and CIT V/s. Eggro Paper Moulds Ltd., to support the appellant's position.

On the other hand, the Ld D.R. argued in favor of the lower authorities' orders, emphasizing the requirement under Explanation-10 to Section 43(1) to reduce any government subsidy from the actual cost of assets for depreciation. The Assessing Officer had excluded the subsidy amount from the cost of assets, leading to an addition to the depreciation calculation.

After considering the arguments, the Tribunal referred to the decision in the case of M/s. Sapna Re-rolling Industries V/s. ITO and the principles laid down in the case of Sasisri Extractions Ltd. V/s. ACIT. It was established that subsidies not specifically intended to offset the cost of assets but rather to accelerate industrial development should not be reduced from the actual cost of assets for depreciation purposes. The Tribunal directed the Assessing Officer to decide the issue in line with the Pune Bench decision in the case of M/s. Sapna Re-rolling Industries V/s. ITO, ultimately allowing the appeal in favor of the assessee.

In conclusion, the Tribunal set aside the orders of the lower authorities and directed the Assessing Officer to reconsider the treatment of the subsidy in accordance with the established legal principles, as outlined in the relevant judgments, thereby allowing the appeal.