2017 (7) TMI 952 - AT - Income Tax

Applying provision of Explanation 10 of Section 43(1) on account of subsidy received - Held that - The admitted facts are that during the year under consideration assessee-company received incentive subsidy from Govt. of Jharkhand as encouragement for setting up of new industrial project and/or expansion/modernization of the existing unit. It is also a fact that maximum limit of the subsidy was restricted with reference to the value of fixed capital investments in land, building, plant and machinery but no part of the subsidy was specifically intended to subsidize the cost of any fixed asset, therefore, it cannot be said that the subsidy was to meet a portion of cost of the asset. According to us, the assessee has rightly not reduced the amount of subsidy received from the actual cost/WDV of the fixed assets while claiming depreciation For the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the actual cost of the capital asset. Thus, we have no hesitation to reverse the order of the lower authorities. The Assessing Officer is directed accordingly. This issue of assessee s appeal is allowed.

Summary

Issues:
1. Application of Explanation 10 of Section 43(1) on subsidy received by the assessee.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) by the assessee, challenging the application of Explanation 10 of Section 43(1) on the subsidy received. The assessee contended that the subsidy received from the Government of Jharkhand was not related to any fixed asset and therefore, should not be reduced from the amount of fixed asset as per the provision of Explanation 10.

The assessee argued before the Commissioner of Income Tax (Appeals) that the subsidy was provided to encourage entrepreneurs for setting up new units or expanding existing units, and thus, should not be subject to the provisions of Explanation 10 of Section 43(1). However, the Commissioner disregarded this argument and upheld the order of the Assessing Officer, citing the insertion of Explanation 10 in the Income Tax Act from 1999 onwards.

In the second appeal before the Appellate Tribunal, the assessee raised multiple grounds challenging the application of Explanation 10 by the Commissioner. The Tribunal considered the facts and the legal position, emphasizing that the subsidy received was not intended to reduce the cost of any specific fixed asset. The Tribunal referred to a similar case law where it was held that the subsidy provided for industrial development did not directly or indirectly meet any portion of the actual cost of the assets.

The Tribunal further analyzed the legal position established by the Supreme Court in previous cases, emphasizing that if the subsidy is not asset-specific but intended to encourage industrial development, it should not be deducted from the actual cost of the assets for the purpose of depreciation. The Tribunal concluded that the subsidy amount cannot be reduced from the actual cost of the capital asset for computing depreciation, reversing the orders of the lower authorities.

In light of the legal precedents and the specific nature of the subsidy received by the assessee, the Tribunal allowed the appeal, directing the Assessing Officer to adjust the depreciation calculation accordingly. The judgment clarified the application of Explanation 10 of Section 43(1) in cases where subsidies are provided for industrial development and not specifically linked to the cost of fixed assets.