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2018 (4) TMI 999 - AT - Income TaxTreatment to the sales tax subsidy - nature of receipt - revenue or capital receipt - Held that - As we examine the U.P. Government subsidy scheme under which the assessee has received the sales tax incentive it is to be noted that the purpose of the subsidy scheme is to attract people to invest and take part in industrialization of certain areas in the State. The subsidy scheme nowhere states that it is for the benefit of generating product purchase from the town / district of U.P. As held in case of Ponni Sugars (2008 (9) TMI 14 - SUPREME COURT), if the object scheme was to enable the assessee to set up a new unit or to expand the unit then the receipt of subsidy was on capital account. The same is the case with the assessee as the U.P. Government subsidy scheme was for enabling the assessee to expand / modernize its existing unit. Therefore,we hold that the sales tax subsidy received by the assessee being a capital receipt is not taxable. This ground is allowed. Disallowance of depreciation on payment made to MSEB for allowing 132KV electric transmission line - Held that - Initially assessee had claimed expenditure incurred towards payment made to MSEB as revenue expenditure which was disallowed by the Assessing Officer holding it as capital expenditure Commissioner (Appeals) allowed the claim of the assessee. While deciding Revenue s appeal against the order of the learned Commissioner (Appeals), the Tribunal restored the order of the Assessing Officer on the issue. The learned Commissioner (Appeals) has rejected assessee s claim of depreciation simply on the reasoning that Tribunal has not issued any such direction. In our view, there is no necessity of Tribunal in directing the Assessing Officer to allow depreciation. Once a particular expenditure is held as capital, consequential benefits attached to such expenditure should automatically follow. That being the case, we direct the Assessing Officer to consider assessee s claim of depreciation on the payments made to MSEB. Grant of interest under section 244A - Held that - We find that the learned Commissioner (Appeals), in fact, has directed the Assessing Officer to calculate interest allowable to the assessee under the provisions of the Act. Be that as it may, considering the submissions made before us, we direct the Assessing Officer to verify assessee s claim and decide the issue in accordance with the relevant statutory provisions. Ground is allowed for statistical purposes. Disallowance of expenditure for allowing transmission line and construction of access road in factory premises at Vizag - Held that - No reason to interfere with the decision of the learned Commissioner (Appeals) on the issue, since, the nature of expenditure incurred by the assessee has attained finality in view of the decision of the Tribunal holding expenditure as capital in nature. So far as allowability of assessee s claim of depreciation, the Assessing Officer is directed to comply to the directions of the Tribunal as above.
Issues Involved:
1. Treatment of sales tax exemption as operational subsidy vs. capital receipt. 2. Disallowance of depreciation on payment made to MSEB for laying 132KV electric transmission line. 3. Grant of interest under section 244A of the Income Tax Act. 4. Disallowance of expenditure incurred for laying transmission line and construction of access road in factory premises at Vizag. Issue-wise Detailed Analysis: 1. Treatment of Sales Tax Exemption as Operational Subsidy vs. Capital Receipt The primary issue was whether the sales tax exemption availed by the assessee from the State Government for setting up an industry in a notified area should be treated as an operational subsidy or a capital receipt. The assessee contended that the sales tax incentive should be treated as a capital receipt based on the purposive test, which examines the purpose for which the subsidy was granted. The assessee argued that the subsidy was meant to encourage industrialization in backward areas by requiring industries to either set up a new unit or make significant capital investments. The Tribunal analyzed the U.P. Government's subsidy scheme and concluded that the subsidy was indeed intended to promote industrialization in specific areas by encouraging new units or expansion of existing units with substantial fixed capital investments. The Tribunal applied the purposive test as laid down by the Hon'ble Supreme Court in CIT v/s Ponni Sugars and Chemicals Ltd., and CIT v/s Chaphalkar Brothers, determining that the subsidy was for capital purposes. Consequently, the sales tax subsidy received by the assessee was held to be a capital receipt and not taxable. 2. Disallowance of Depreciation on Payment Made to MSEB for Laying 132KV Electric Transmission Line The assessee initially claimed the expenditure incurred for laying a 132KV electric transmission line as a revenue expenditure, which was disallowed by the Assessing Officer (AO) and subsequently upheld by the Tribunal as capital expenditure. The assessee then claimed depreciation on this capital expenditure, which the Commissioner (Appeals) rejected on the grounds that the Tribunal had not issued a specific direction for allowing depreciation. The Tribunal clarified that once an expenditure is held as capital, the consequential benefits, such as depreciation, should automatically follow. Therefore, the Tribunal directed the AO to consider the assessee's claim for depreciation on the payments made to MSEB. 3. Grant of Interest Under Section 244A of the Income Tax Act The assessee challenged the withdrawal of interest under section 244A, which was initially granted during the original assessment but withdrawn after giving effect to the Tribunal's order. The assessee argued that the income computed under MAT provisions remained unchanged, and thus, the interest should not have been withdrawn. The Tribunal found that the Commissioner (Appeals) had already directed the AO to calculate the interest allowable under the provisions of the Act. The Tribunal further directed the AO to verify the assessee's claim and decide the issue in accordance with the relevant statutory provisions. 4. Disallowance of Expenditure Incurred for Laying Transmission Line and Construction of Access Road in Factory Premises at Vizag The assessee incurred expenditure for laying a transmission line and constructing an access road at its Vizag factory, initially claimed as revenue expenditure but held as capital in nature by the Tribunal. The issue was restored to the AO to allow depreciation on this capital expenditure. The Tribunal upheld the decision of the Commissioner (Appeals) to direct the AO to examine the admissibility of depreciation in respect of the capital expenditure incurred. The Tribunal instructed the AO to comply with the Tribunal's earlier directions and decide the matter afresh. Summary of Decisions: - ITA no.3938/Mum./2013: Allowed the assessee's claim of sales tax subsidy as a capital receipt. - ITA no.2197/Mum./2014: Partly allowed; directed the AO to consider the assessee's claim of depreciation on payments made to MSEB. - ITA no.2198/Mum./2014: Partly allowed; directed the AO to consider the assessee's claim of depreciation and to verify the interest claim under section 244A. - ITA no.7062/Mum./2014: Partly allowed; directed the AO to consider the assessee's claim of depreciation and to comply with the Tribunal's earlier directions regarding the capital expenditure at Vizag factory. Order pronounced in the open Court on 18.04.2018.
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