2021 (8) TMI 1035 - AT - Income Tax

Nature of Cash subsidy received from Madhya Pradesh Rajyasetu Nirman - Reduction from the project cost - Amortization of expenditure - DR submitted that the amount of cash subsidy should have been offered to tax instead of showing it in the balance sheet under the head Capital Reserve it is because the amount of cash subsidy directly relates to the project of the assessee - HELD THAT - Firstly subsidy was received by the assessee in the earlier years and therefore if at all it was to be subjected to tax then it should have been done in the year in which it was received - amount of subsidy received by the assessee in the earlier years cannot be added to the income of the year under consideration. Secondly, the assessee has incurred the expenses with respect to the projects as discussed above on actual basis which is evident from the financial statement of the assessee. Likewise, the assessee for the purpose of income tax has amortized the project expenses over the concession period of projects after reducing the subsidy amount of ₹ 83.80 crores received by it in the earlier years. Admittedly, the amount of capital subsidy received by the assessee in the earlier years was shown under the head capital reserve in the financial statements prepared under the Companies Act - assessee, while amortizing the project expenses has adjusted the amount of subsidy in the profit and loss account. This fact can also be verified from the financial statement of the assessee which are placed on record. Accordingly we hold that the finding of the AO that assessee has not adjusted the amount of capital subsidy against the project expenses is devoid of any merit. At the time of hearing, the learned DR has also not brought anything on record contrary to the finding of the learned CIT(A). Undoubtedly, the assessee has incurred the expenses on the projects which were in the nature of BOT. Thus the assessee was entitled to amortize the expenses over the concession period of these projects. Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of cash subsidy received from the government.
2. Treatment of cash subsidy in the financial statements and its tax implications.
3. Amortization of project expenses and the applicability of Income Tax provisions.

Detailed Analysis:

1. Deletion of Addition on Account of Cash Subsidy Received from the Government:

The Revenue contended that the Ld. CIT(A) erred in deleting the addition of ?83.80 crores, which was the cash subsidy received from the Madhya Pradesh Rajyasetu Nirman. The Assessing Officer (AO) argued that the assessee failed to provide cogent evidence that the cash subsidy was reduced from the project expenditure in the Profit & Loss Account. The AO also claimed that the expenditure was estimated on a notional basis without supporting evidence, leading to artificial proliferation of expenses.

The Ld. CIT(A), however, found that the cash subsidies were received in the years prior to the current assessment year and should be taxed in the year of receipt. The assessee had reduced the subsidy from the project cost and amortized the balance over the concession period. This method was in line with the CBDT Circular No. 09 of 2014. The CIT(A) concluded that there was no income to be added for the current year, thereby deleting the AO's addition.

2. Treatment of Cash Subsidy in the Financial Statements and Its Tax Implications:

The AO observed that the assessee had shown the cash subsidy under "Capital Reserve" in the balance sheet and argued that it should have been reduced from the project expenses in the year of receipt, with the remaining subsidy offered to tax. The AO treated the subsidy as income since it was not adjusted against the project costs.

The Ld. CIT(A) noted that the assessee had incurred actual project expenses and reduced the subsidy from these costs, amortizing the balance over the concession period. This approach was consistent with the accounting standards and the CBDT Circular, which allows spreading the cost of infrastructure development over the concession period. The CIT(A) found no merit in the AO's claim that the expenses were notional and upheld the assessee's method of accounting.

3. Amortization of Project Expenses and the Applicability of Income Tax Provisions:

The AO contended that there was no provision in the Income Tax Act for amortizing future expenses. However, the CIT(A) and the Tribunal found that the assessee's method of amortizing the project expenses, net of subsidy, over the concession period was valid. The CBDT Circular No. 09 of 2014 explicitly allows for the amortization of expenses incurred on BOT (Build-Operate-Transfer) projects, treating them as allowable business expenditure.

The Tribunal upheld the CIT(A)'s decision, stating that the subsidy received in earlier years could not be taxed in the current year. The assessee's financial statements confirmed the actual incurrence of project expenses, and the method of amortization was consistent with the CBDT guidelines. The Tribunal dismissed the Revenue's appeal, affirming that the AO had exceeded his jurisdiction by adding the earlier year's subsidy to the current year's income.

Conclusion:

The Tribunal concluded that the addition made by the AO was unsustainable. The assessee's method of accounting for the subsidy and amortizing project expenses was in line with the CBDT Circular and accounting standards. The appeal filed by the Revenue was dismissed, and the order of the CIT(A) was upheld.