2019 (8) TMI 1784 - AT - Income Tax

Disallowance of depreciation u/s 32(1) r.w.s.43(l) - assets of the assessee company have been acquired by it in a scheme of demerger - As per AO assets of erstwhile entity were acquired out of the amount of the excise duty exemption which was accounted as deferred government grants in the books of accounts and therefore in accordance with the provision of Explanation-10 to section 43(1) actual cost of such assets of the demerged company should be nil as the entire cost of the assets had been met out by the Central Government - HELD THAT - As relying on own case M/S AVICHAL BUILDCON (P) LTD. AND (VICE-VERSA) 2019 (2) TMI 47 - ITAT DELHI Excise duty refund is not in the form of capital subsidy or grant which can be reduced from the cost of assets. Therefore we agree with the argument of the appellant and in facts and circumstances as discussed above with due respect we differ from the findings of Ld.CIT(A) in the earlier Assessment years on the same issue and also in view of the ratio laid down by Hon ble Supreme Court in MEGHALAYA STEELS LTD 2016 (3) TMI 375 - SUPREME COURT - Accordingly findings of the A.O. are erroneous and therefore disallowance is deleted. Thus we restore the issue in dispute to the file of the Assessing Officer to decide in accordance with the direction of the Tribunal - The grounds of the appeal of the Revenue are accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of depreciation under Section 32(1) read with Section 43(1) of the Income-tax Act.
2. Treatment of excise refund as a revenue receipt vis-a-vis its reduction from the cost of plant and machinery.
3. Perceived errors and perversity in the order of the Commissioner of Income-tax (Appeals) [CIT(A)].

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation under Section 32(1) read with Section 43(1) of the Income-tax Act:
The Revenue appealed against the CIT(A)'s direction to delete the disallowance of ?3,54,15,791/- made on account of depreciation. The Assessing Officer (AO) had reduced the depreciation claim by considering the excise duty exemption as a deferred government grant, which, according to the AO, should reduce the actual cost of the assets to nil under Explanation 10 to Section 43(1). The CIT(A) disagreed, noting that the excise duty refund was a revenue receipt and not a capital subsidy, thus it should not reduce the cost of assets for depreciation purposes. The Tribunal upheld the CIT(A)'s view, referencing the Supreme Court's decision in Commissioner of Income Tax vs. Meghalaya Steels Ltd., which treated such subsidies as revenue receipts.

2. Treatment of Excise Refund as a Revenue Receipt:
The CIT(A) and the Tribunal both treated the excise refund as a revenue receipt, which forms part of the profits and gains from business. The AO had argued that the excise refund should reduce the cost of the assets, thus impacting the depreciation calculation. However, the CIT(A) referred to the Supreme Court's judgment in Meghalaya Steels Ltd., which held that such refunds are revenue in nature and should be included in the profit and loss account. The Tribunal agreed, stating that the excise refund is not a capital subsidy and should not reduce the cost of plant and machinery.

3. Perceived Errors and Perversity in the Order of the CIT(A):
The Revenue contended that the CIT(A)'s order was perverse and failed to appreciate the material facts. However, the Tribunal found that the CIT(A) had carefully considered the assessment order, written submissions, and relevant case laws. The CIT(A) concluded that the excise duty refund should be treated as a revenue receipt and not reduce the cost of the assets. The Tribunal supported this conclusion, noting that the CIT(A)'s findings were consistent with the Supreme Court's ruling in Meghalaya Steels Ltd. and other relevant case laws.

Tribunal's Decision:
The Tribunal restored the issue to the AO to decide in accordance with its directions and the precedents set by the Supreme Court and other relevant judgments. The Tribunal emphasized that the AO should consider what happened in preceding years regarding the depreciation claims and whether the excise duty refund was treated as a revenue receipt. The Tribunal also directed the AO to allow the deduction under Section 80IC if the depreciation claim was allowed, making the Revenue's appeal academic if the assessed income turned negative.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to treat the excise duty refund as a revenue receipt and not reduce the cost of plant and machinery for depreciation purposes. It restored the issue to the AO for re-examination in light of the Supreme Court's decision and other relevant case laws. The appeals were allowed for statistical purposes, ensuring that the assessee would be afforded adequate opportunity to be heard.