2016 (5) TMI 765 - AT - Income Tax

Treatment of subsidy receipt - capital or revenue subsidy - Held that - It is clear from the reading of the objective of the scheme is to was to enable the assessee to set up a new unit. The object of the Scheme in the present case was to promotion of industries in the state of West Bengal. It was available to a New Unit which has been defined under the scheme to mean an industrial unit in the large medium/small scale sector having investment in capital assets which is established and commissioned by the entrepreneur for the manufacture of goods in West Bengal, for the first time on or after the 1st January, 2000 and is registered with the Directorate of Industries/Directorate Cottage & Small Scale Industries/Directorate of Tourism. Once the objective of the scheme is to enable setting up of a new unit, the manner and quantum in which the subsidy is disbursed is of no consequence. In the given facts and circumstances of the case. Merely because subsidy received was equivalent to a substantial percentage of the sales tax paid, it cannot be construed that the same was in form of refund of sales tax paid and exigible to tax. Hence one time subsidy received from the State Government under the scheme of industrial promotion for expansion of its facilities and for modernization purposes is capital receipt and cannot be brought into tax net. Depreciation on moulds - Held that - We are of the view that the issue requires fresh consideration by the AO. There is no basis to come to a conclusion that rolling mills used in iron and steel industry are also in the nature of moulds but are in a rolling form. As to whether they are materially same or different cannot be decided without technical and expert evidence. It is also seen that moulds used in rubber and plastic manufacture are entitled to higher depreciation of 30%. A different treatment for moulds used in iron ingot manufacture cannot be allowed on the basis of such general observations as done by the CIT(A). Therefore we set aside the order of the CIT(A) on this issue and direct the AO to examine the claim of the Assessee in the light of the observations made above.

Issues Involved:
1. Treatment of subsidy as capital or revenue receipt.
2. Allowance of depreciation on moulds.

Detailed Analysis:

1. Treatment of Subsidy as Capital or Revenue Receipt:

The primary issue revolves around whether the subsidy received by the assessee from the West Bengal Industrial Development Corporation (WBIDC) should be treated as a capital receipt or a revenue receipt. The subsidy amounting to ?31,15,000 was received under the West Bengal Incentive Scheme 2000, which aimed to promote industries in backward areas. The assessee argued that the subsidy was a capital receipt, not chargeable to tax, as it was intended for fixed capital investment in setting up a new industrial unit in a backward area.

The Assessing Officer (AO) contended that since the subsidy was deposited in the cash credit account of the assessee, it became part of the general pool of funds and should be treated as revenue in nature. The AO also pointed out that the assessee claimed depreciation on the full amount of the written down value (W.O.V.) of plant and machinery without adjusting the subsidy amount, indicating that the subsidy was revenue in nature.

The CIT(A) ruled in favor of the assessee, stating that the subsidy was granted before the commencement of production and was related to fixed capital investment, thus qualifying as a capital receipt. The CIT(A) relied on the Supreme Court judgments in the cases of PJ Chemicals Ltd (1994) 210 ITR 830 (SC) and Senairam, Durgamall 42 ITR 392 (SC), as well as the ITAT Kolkata Bench decision in Rasoi Ltd Vs Dy Commissioner of Income Tax, which supported the view that subsidies intended for fixed capital investment are capital receipts.

The Tribunal upheld the CIT(A)'s decision, emphasizing the "Purpose Test" established by the Supreme Court in CIT, Madras vs. Ponni Sugars & Chemicals Limited, which determines the nature of a subsidy based on its objective. Since the subsidy in question aimed to promote industrial development in backward areas and was linked to fixed capital investment, it was deemed a capital receipt.

2. Allowance of Depreciation on Moulds:

The second issue concerns the rate of depreciation applicable to moulds used by the assessee. The AO observed that the assessee claimed depreciation at 30% on moulds, while the AO believed that moulds should be treated as plant and machinery, warranting a depreciation rate of 15%. Consequently, the AO added back ?12,54,893 to the total income of the assessee.

The CIT(A) disagreed with the AO, noting that as per Section 32 and Rule 5 of the Income Tax Act, depreciation is allowable at 80% for moulds used in the iron and steel industry. The CIT(A) pointed out that the assessee had only claimed 30% depreciation, which was lower than the allowable rate.

The Tribunal, however, found that the issue required further examination by the AO. The Tribunal highlighted that there was no basis to conclude that rolling mills used in the iron and steel industry are equivalent to moulds in a rolling form. The Tribunal directed the AO to reassess the claim of the assessee with technical and expert evidence to determine whether the moulds used in the iron and steel industry are materially the same as those used in rubber and plastic manufacture, which are entitled to higher depreciation.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decision regarding the subsidy being a capital receipt but remanded the issue of depreciation on moulds back to the AO for further examination. The order was pronounced in the court on 6.4.2016.

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