2021 (8) TMI 853 - AT - Income Tax

Excess depreciation on Capital subsidy received from Government of India - Whether said subsidy partake the nature of capital contribution and hence the same is in the nature of capital receipt, which cannot be taxed under the Act? - HELD THAT - There is no merit in the reasons given by the AO to consider capital subsidy as part of cost of asset directly/indirectly met by third party, because capital subsidy received from Government of India is for setting up of new food processing industry as per the scheme of promotion of industries in the industrially backward areas - said subsidy partake the nature of capital contribution and hence the same is in the nature of capital receipt, which cannot be taxed under the Act. CIT-A Once the amount is in the nature of capital receipt, question of reduction of said subsidy from the cost of plant machinery as per the provisions of section 43(1) of the Act does not arise. This proposition was supported by the decision of the Hon'ble Jurisdictional High Court of Madras in the case of M/s. Srinivas Industries 1991 (1) TMI 120 - MADRAS HIGH COURT where it was held that amount of subsidy made available cannot be deducted from the cost of capital asset for the purpose of working out depreciation u/s. 43(1) - This proposition was further supported by the decision of the Hon'ble High Court of Rajasthan in the case of CIT vs. Ambica Electrolytic Capacitor, 1990 (9) TMI 24 - RAJASTHAN HIGH COURT . We, therefore are of the considered view that the AO was erred in reducing capital subsidy received for setting up of new food processing industry from the plant machinery for computing depreciation.CIT(A) rightly deleted addition made by the AO towards excess depreciation - Decided in favour of assessee.

Summary

Issues:
1. Excess disallowance of depreciation claimed.
2. Relatability of subsidy to specific asset/plant and machinery.
3. Application of provisions of Sec. 43(1) of the Income Tax Act.

Analysis:
1. The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding excess disallowance of depreciation claimed. The Revenue contended that the subsidy received was tied to the purchase of assets for a specific project, thus should be reduced from the cost of assets before claiming depreciation. The assessee argued that the subsidy was in the nature of capital receipts and should not be taxed, hence not required to be deducted from the asset's cost. The ITAT Chennai, after considering the arguments, held that the subsidy received for setting up a new food processing industry was a capital contribution and not taxable. The ITAT relied on precedents to support its decision, concluding that the AO erred in reducing the subsidy from the plant & machinery cost for computing depreciation. The ITAT upheld the CIT(A)'s decision to delete the excess depreciation claim.

2. The second issue revolved around the relatability of the subsidy to a specific asset or plant and machinery. The Revenue argued that the subsidy was directly tied to the purchase of assets for a specific project, thus should be deducted from the asset's cost. On the other hand, the assessee contended that the subsidy was meant for promoting industries in backward areas and should not be deducted from the asset's cost for depreciation purposes. The ITAT, after analyzing the nature of the subsidy and its purpose, agreed with the assessee's argument. The ITAT held that the subsidy was a capital receipt and not subject to taxation, therefore, should not be reduced from the cost of the plant & machinery for computing depreciation.

3. The final issue involved the application of provisions of Sec. 43(1) of the Income Tax Act. The AO reduced the capital subsidy received from the Government from the cost of assets, considering it as part of the cost met by a third party. However, the ITAT disagreed with this interpretation, stating that the subsidy was a capital contribution for promoting industries in backward areas. The ITAT emphasized that since the subsidy was in the nature of a capital receipt, it should not be taxed or reduced from the asset's cost for depreciation calculation. The ITAT relied on judicial precedents to support its decision and upheld the CIT(A)'s order to delete the excess depreciation claim made by the AO.

In conclusion, the ITAT Chennai dismissed the Revenue's appeal, upholding the CIT(A)'s decision regarding the treatment of the subsidy received by the assessee for setting up a new food processing industry.