2014 (12) TMI 436 - AT - Income Tax

Sales tax incentive allowed by State Govt. Capital receipts or not Reduction from cost of fixed assets for computation of depreciation as per Explanation-10 to Sec. 43(1) - Held that - The assessee s issue of Sales Tax Incentive is capital in nature for the reason that the very scheme under which the expansion of the unit and subsidy under Rajasthan Sales Tax Scheme 1998 was received explains the purpose of the scheme as incurring capital expenditure for installation of plant and machinery and for eligible for fixed capital investment - CIT(A) has rightly treated the sales tax subsidy receipt as capital in nature - assessee has rightly not reduced the amount of subsidy received from the actual cost/WDV of the fixed assets while claiming depreciation in Commissioner of Income-Tax Versus PJ Chemicals Limited (And Other Appeals) 1994 (9) TMI 1 - SUPREME Court it has been 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 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 the FY 2005-06 relevant to AY 2006-07 and claimed 50% additional depreciation u/s. 32(1)(iia) of the Act in view of the second proviso to section 32(1)(ii) - the balance 50% of additional depreciation on such plant and machinery has been claimed by the assessee company during the year under consideration i.e. the FY 2006-07 relevant to this AY 2007-08 - the assessee is eligible for additional depreciation in case the new machinery and plant was acquired and installed after 31-03-2005 - benefits conferred 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) - 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 AY - the assessee 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 - the assessee is entitled for additional depreciation u/s. 32(1)(iia) of the Act in this assessment year also. Treatment of interest subsidy from the state government Revenue receipt or not - Held that - The subsidy includes interest subsidy as well as wage/employment subsidy for investment made in modernization/expansion/diversification of the unit eligible for subsidy under the scheme from the date of payment of sales tax - the subsidy was to be granted only if the specified minimum funds were borrowed on long term basis for creation of fixed assets and was to be paid only if such loans were repaid along with interest in time - the scheme ensured timely repayment of the loans with interest taken for creating fixed assets for the purpose of expansion relying upon CIT v Ponni Sugars and Chemicals Limited 2008 (9) TMI 14 - SUPREME COURT wherein it has been held that the subsidy received by the assessee was a capital receipt - 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 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 Rs. 1, 34, 79, 846/- claimed as exempt u/s.10(34) of the Act and dividend of Rs. 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 assessee. Treatment of industrial promotion assistance received Revenue in nature or not Held that - The issue was raised before CIT(A) by way of additional ground but he has not adjudicated for the reason that the assessee has not filed revised return for making the claim but he has made claim by way of computation of income- this issue requires adjudication because the facts are already available in the assessment records thus the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee.

Summary

Issues Involved:

1. Nature of sales tax incentives.
2. Application of Explanation 10 to Section 43(1) of the Income-tax Act.
3. Allowance of balance 50% additional depreciation.
4. Treatment of interest subsidy.
5. Disallowance of leave encashment under Section 43B(f).
6. Disallowance under Section 14A.
7. Treatment of industrial promotion assistance.
8. Deduction of proportionate amount of leasehold land written off.
9. Addition on account of profit on sale of fixed assets.

Issue-wise Detailed Analysis:

1. Nature of Sales Tax Incentives:
The Tribunal upheld the CIT(A)'s decision that the sales tax incentives received by the assessee under the Rajasthan Sales Tax Exemption Scheme were capital receipts. The Tribunal noted that the scheme's purpose was to encourage capital expenditure for the expansion of the unit. The Tribunal referenced its own decisions in the assessee's case for previous assessment years, where similar subsidies were treated as capital receipts.

2. Application of Explanation 10 to Section 43(1):
The Tribunal held that the sales tax subsidy should not be reduced from the actual cost of fixed assets for computing depreciation. The Tribunal referred to the Supreme Court's decision in CIT v. P.J. Chemical Ltd., which stated that if a subsidy is not intended to meet the cost of an asset, it should not reduce the actual cost. The Tribunal found that the subsidy was not asset-specific and thus should not reduce the actual cost for depreciation purposes.

3. Allowance of Balance 50% Additional Depreciation:
The Tribunal allowed the assessee's claim for the balance 50% additional depreciation on new plant and machinery put to use for less than 180 days in the preceding year. The Tribunal held that the second proviso to Section 32(1)(ii) does not prohibit the allowance of the remaining 50% in the subsequent year. The Tribunal referenced decisions from other benches supporting this interpretation.

4. Treatment of Interest Subsidy:
The Tribunal held that the interest subsidy received under the Rajasthan Investment Promotion Scheme, 2003, was a capital receipt. The Tribunal noted that the subsidy was intended to assist in the repayment of loans taken for expansion and modernization, thus qualifying as capital in nature. The Tribunal directed the AO to reduce the subsidy amount from the actual cost of fixed assets for depreciation purposes.

5. Disallowance of Leave Encashment under Section 43B(f):
The Tribunal remitted the issue back to the AO to await the Supreme Court's decision on the applicability of Section 43B(f) concerning the provision for leave encashment. The Tribunal noted that the jurisdictional High Court's decision in Exide Industries Ltd. was stayed by the Supreme Court.

6. Disallowance under Section 14A:
The Tribunal held that Rule 8D could not be applied retrospectively to the assessment year 2007-08. The Tribunal found that the AO had not provided any evidence of a nexus between the expenditure and the exempt income. Consequently, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal on this issue.

7. Treatment of Industrial Promotion Assistance:
The Tribunal remitted the issue back to the AO for fresh adjudication, noting that the CIT(A) had not admitted the ground due to the absence of a revised return. The Tribunal referenced a similar remand in the assessee's case for the previous assessment year.

8. Deduction of Proportionate Amount of Leasehold Land Written Off:
The Tribunal upheld the CIT(A)'s decision to allow the deduction, referencing its own decision in the assessee's case for the previous assessment year. The Tribunal found no infirmity in the CIT(A)'s order.

9. Addition on Account of Profit on Sale of Fixed Assets:
The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO. The Tribunal referenced its own decision in the assessee's case for the previous assessment year, where it was held that the accounting treatment could not affect the statutory provisions of Section 43(6) concerning the block of assets concept.

Conclusion:
The Tribunal's judgment addressed multiple issues related to the nature and treatment of various subsidies, depreciation allowances, and disallowances under the Income-tax Act. The Tribunal provided detailed reasoning for each issue, often referencing previous decisions in the assessee's case and relevant Supreme Court judgments. The appeals resulted in a mix of confirmations, remands, and dismissals, reflecting the complexity of the tax matters involved.