2022 (4) TMI 809 - HC - Income Tax

Determination of cost of assets - Depreciation - Applicability of Explanation and proviso to 43(1) - subsidy utilisation specifically under the head building, furniture, plant machinery and computer software - Grant received by the Appellant from the Government of India under the Scheme Assistance to States for developing Export Infrastructure and other allied activities (ASIDE) to be reduced from the cost of assets under Section 43(1) and Explanation thereto - Whether by virtue of Explanation 10 and/or proviso to Explanation 10 to Section 43(1) introduced with effect from 01.04.1999, a subsidy or grant received without reference to specific assets is to be apportioned and reduced to the cost of assets for the purpose of computing depreciation? - HELD THAT - The proviso enables adjustment of subsidy in all the assets of the assessee. The language of the proviso is clear that the subsidy received without specifics shall have to be adjusted from the assets of the assessee. The object is to limit depreciation only on the actual cost of the assets of the assessee. The proviso takes care of the general financial assistance i.e. without specific purpose, received and the actual cost is worked as per the proviso. We follow the precedent in Sundaram Pillai case 1985 (1) TMI 306 - SUPREME COURT on the point and hold that the proviso is an independent expression on working of actual cost of assets of assessee. The assessee, under t(he ASIDE, in the assessment year 2008-09 received and for the assessment year 2009-10 though has not received any financial assistance, the actual cost of the asset has been reworked by deducting the financial assistance received up to the financial year 2000-01. Any other interpretation or construction of Explanation 10 and proviso would be contrary to the explicit words used by the parliament for achieving a particular object of granting depreciation on the actual cost incurred by the assessee. The Explanation and the proviso, in our understanding, are clear and do not suffer from ambiguity. This relates other substantial questions of law and would be considered independently. Hence, we hold that financial assistance received without reference to specific purpose, still by application of proviso to Explanation 10 of section 43(1) of the Act the actual cost is apportioned and reduced from the cost of the assets of the assessee for the purpose of computing the depreciation. For the above reasons, the common question in both the appeals is answered in favour of Revenue and against the assessee. Apportionment of the subsidy to building, furniture, plant machinery, computer software etc. is illegal and contrary to the definition of the actual cost under Section 43(1) of the act r/w Explanation 10 r/w proviso - Revenue is unable to controvert the stand of the assessee that in the exercise of the discretion given to the assessee on utilisation of funds, the assessee has enhanced the capacity of existing facilities viz. power, water distribution in the Industrial Park under its administration. For the purpose of Section 32 of the Act, the actual cost of assets alone will have to be determined, and in a broad spectrum, the subsidy is deducted even in respect of the assets which did not have value addition from or through the financial assistance received under ASIDE then the very purpose of depreciation of an asset is defeated/undermined. The extent of details furnished in Annexure1 to the assessment order dated 15.12.2010, we are of the view that the apportionment of subsidy against the written down value of the assets as on 01.04.2007 on building, furniture and plant machinery, computer software etc. suffer from patent illegality and what is due to the assessee while determining the actual cost of the asset is denied. Therefore, the order of assessment is set aside to the extent that the subsidy is apportioned against all the assets viz. building, furniture and plant machinery, computer software. The matter is remitted to the Assessing Officer for determination afresh. The assessee, since can place the actual cost after deducting the amount spent in the capacity building of the water and power distribution and files revised statements taking into consideration such revised statements, the assessment is completed. The question under consideration is answered in favour of the assessee and against the Revenue. Computation of depreciation under Section 32 r/w Section 43 for the assessment year 2009-10 - The Central Government is left to the discretion of the State Government and/or the authorities where export-oriented industries are set up to replenish the infrastructure from the financial assistance given to the assessee - This being the undisputed fact, treating the entire financial assistance received in the slab years as falling under the proviso introduced with effect from 01.04.1999 is illegal and unsustainable. It is not the case of Revenue before us that the amendment is retrospective. The justification offered for reworking the actual cost of assets is on the ratio decided in Saharanpur Electric Supply 1992 (1) TMI 2 - SUPREME COURT - We have already held that the said judgment is distinguishable. No material is placed indicating that the amendment inserted through the Finance (No.2) Bill, 1998 has retrospective operation or nullified the dictum of PJ Chemicals. We are in complete agreement with the view expressed both by this Court and the Gujarat High Court, on the amendment to Section 43(1), Explanation 10 and the proviso as prospective. The adjustment of ₹ 13,75,00,885/- as noted in the assessment order is illegal, and even for the view, we have taken while answering the main question, unsustainable. Having regard to the above discussion, we are of the view that the computation of depreciation under Section 32 r/w Section 43 for the assessment year 2009-10 is illegal and liable to be set aside and accordingly set aside. The Assessing Officer is directed to re-determine the actual cost by excluding the amount received by the assessee prior to 31.03.1999. This Court held that apportionment on the written down value of the assets as on 01.04.2008 and also on all the assets of the assessee, for the assessment year 2008-09 is illegal. The adjustment at best could be against the assets which received the addition from financial assistance received under ASIDE. Therefore, insofar as the assessment year 2009-10 is concerned, the inclusion of the financial assistance received upto 31.03.1999 is incorrect and contrary to the ratio of PJ Chemicals judgment 1994 (9) TMI 1 - SUPREME COURT . Therefore by excluding assistance received upto 31.03.1999 the balance financial assistance i.e ₹ 1,51,00,000/- received needs to be reworked. It is hardly clear from the material on record that the reasons for including ₹ 3,75,88,500/-in the assessment year for working the actual cost of the assets for depreciation for the assessment year 2009-10. Therefore, to the limited extent of financial assistance received after 01.04.1999, the assessee is given liberty to file a statement on utilisation of assistance for capacity building of assets in the subject assessment years and the Assessing Officer shall pass fresh orders. The question as indicated above is answered in favour of the assessee and against the Revenue

Summary

Issues Involved:
1. Applicability of Explanation 10 and proviso to Section 43(1) of the Income Tax Act.
2. Apportionment of subsidy to specific assets.
3. Retrospective application of Explanation 10 and proviso to Section 43(1) of the Act.

Issue-wise Detailed Analysis:

1. Applicability of Explanation 10 and proviso to Section 43(1) of the Income Tax Act:
The court examined whether the financial assistance received under the ASIDE scheme should be reduced from the cost of assets for computing depreciation under Section 43(1) of the Act. The court noted that the assistance was not asset-specific and thus, Explanation 10 per se was not applicable. However, the proviso to Explanation 10, which deals with subsidies not directly relatable to a specific asset, was applicable. The court concluded that the proviso allows for the apportionment of general financial assistance across all assets of the assessee, thereby reducing the actual cost of the assets for depreciation purposes. The court held that the financial assistance received without reference to a specific purpose should still be apportioned and reduced from the cost of the assets as per the proviso to Explanation 10.

2. Apportionment of subsidy to specific assets:
The court addressed the issue of whether the apportionment of subsidy to various assets by the Assessing Officer was legal. The assessee argued that the subsidy was used for enhancing the capacity of existing facilities and not for acquiring specific assets. The court found that the apportionment of the subsidy against all assets, as done by the Assessing Officer, was illegal and arbitrary. The court set aside the assessment order to the extent of the apportionment and remitted the matter back to the Assessing Officer for fresh determination. The assessee was directed to provide revised statements showing the actual cost after deducting the amount spent on capacity building.

3. Retrospective application of Explanation 10 and proviso to Section 43(1) of the Act:
The court examined whether the financial assistance received prior to 01.04.1999 could be adjusted in the assessment year 2009-10. The court held that Explanation 10 and the proviso introduced with effect from 01.04.1999 do not have retrospective operation. Therefore, any assistance received before 01.04.1999 could not be adjusted in the assessment year 2009-10. The court relied on the judgments in CIT vs Sun Fiber Optics and Banco Products vs DCIT, which held that the amendment to Section 43(1) is prospective. Consequently, the adjustment of ?13,75,00,885/- in the assessment year 2009-10 was deemed illegal and unsustainable.

Conclusion:
The court concluded that the financial assistance received should be apportioned and reduced from the cost of the assets for computing depreciation as per the proviso to Explanation 10 of Section 43(1). The apportionment of subsidy against all assets was found to be illegal, and the matter was remitted back to the Assessing Officer for fresh determination. The court also held that the amendment to Section 43(1) is prospective, and financial assistance received before 01.04.1999 cannot be adjusted in subsequent assessment years. The appeals were allowed in part, and the matters were remitted to the Assessing Officer for fresh orders.