2015 (10) TMI 1282 - HC - Income Tax

Subsidy received prior to insertion of Explanation 10 to section 43(1) - whether can still be reduced from the cost of assets? - Held that - On the date when the assessee had invested in fixed capital assets, Explanation 10 to sub-section (1) of section 43 of the Act was not on the statute book and hence, the actual cost came to be computed in terms of the law as existing at the relevant time. Nothing happened in the year under consideration so as to justify the action of reduction from the written down value of the block of assets. Explanation 10 to sub-section (1) of section 43 of the Act came into effect only from 1.4.1999 that too prospectively and, therefore, has no application, more so, when plant itself was set-up in assessment year 1993-94. First question is answered in the negative that is in favour of the appellant assessee and against the revenue. It is, accordingly, held that the Income Tax Appellate Tribunal was not right in law in holding that the amount of subsidy received prior to insertion of Explanation 10 to sub-section (1) of section 43 of the Act can still be reduced from the cost of assets. - Decided in favour of assessee. Deduction u/s 80HHC - ITAT held that for the purpose of calculating deduction u/s 80HHC gross interest income without reducing therefrom the interest expenditure, is required to be excluded - Held that - As decided in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax, 2012 (2) TMI 101 - SUPREME COURT OF INDIA Ninety per cent of not the gross interest/rent but only the net interest/rent, which has been included in the profits of the business of the assessee as computed under the heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. Matter remanded back to A.O. to work out the deductions Decided in favor of assessee by way of remand

Summary

Issues Involved:
1. Reduction of subsidy from the cost of assets before the insertion of Explanation 10 to section 43(1) of the Income Tax Act.
2. Calculation of deduction under section 80HHC of the Income Tax Act, specifically whether gross interest income should be excluded without reducing interest expenditure.

Detailed Analysis:

Issue 1: Reduction of Subsidy from the Cost of Assets

The appellant challenged the Tribunal's decision that the subsidy received prior to the insertion of Explanation 10 to section 43(1) of the Income Tax Act can still be reduced from the cost of assets. The assessee received a subsidy of Rs. 25,00,000 from the Commissioner of Industries for investments in capital assets, sanctioned in 1989 but received in the assessment year 2000-2001. The Assessing Officer reduced the cost of assets by the subsidy amount based on Explanation 10 to section 43(1), which was inserted with effect from 1.4.1999. The assessee argued that the assets were capitalized in 1993-94 when Explanation 10 was not in existence, and hence, the written down value (WDV) of the block of assets should not be adjusted by the subsidy amount.

The court examined the statutory provisions, including the definitions of "actual cost" and "written down value" under section 43 of the Act. It noted that at the time of asset acquisition, the subsidy was not disbursed, and the actual cost was computed as per the law then in force. The assets, forming part of a block, lost their independent identity, and depreciation was granted on the WDV of the block. The court concluded that Explanation 10, inserted after the assets were acquired and capitalized, could not retrospectively reduce the cost of assets that had already entered the block. The statute does not allow for the WDV of a block of assets to be reduced by the subsidy amount once the assets are part of the block. Therefore, the Tribunal's decision to reduce the cost of assets by the subsidy amount was incorrect.

Issue 2: Calculation of Deduction under Section 80HHC

The second issue involved whether gross interest income should be excluded without reducing interest expenditure for calculating deduction under section 80HHC. The Assessing Officer excluded 90% of the gross interest income from the profits of the business, arguing that the interest was not incidental to the assessee's normal business activities. The assessee contended that only net interest (interest income minus interest expenditure) should be considered.

The court referred to the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax, which clarified that only 90% of the net interest income (interest income after deducting interest expenditure) should be excluded from the business profits for calculating the deduction under section 80HHC. The court directed the Assessing Officer to recompute the deduction in light of this decision, ensuring that only the net interest income is excluded from the business profits.

Conclusion:

The court allowed the appeal, ruling in favor of the assessee on both issues. It held that the subsidy received before the insertion of Explanation 10 to section 43(1) could not reduce the cost of assets, and directed the Assessing Officer to recompute the deduction under section 80HHC by excluding only the net interest income from the business profits.