2021 (9) TMI 1554 - AT - Income Tax

Disallowance of depreciation u/s 32(1) r.w.s. 43(1) - assets on which depreciation has been claimed by the assessee company has been acquired out of Government grants (excise duty exemptions) obtained by the demerged company - Whether excise refund being revenue receipt can be reduced from the cost of plant machinery? - HELD THAT - As following the orders passed by the coordinate Bench of the Tribunal in Assessment Years 2010-11 2018 (11) TMI 1774 - ITAT DELHI 2011-12 2018 (9) TMI 1791 - ITAT DELHI and 2012-13 2013-14 2020 (4) TMI 86 - ITAT DELHI which are based upon the decision rendered in case of CIT vs. Meghalaya Steels Ltd. 2016 (3) TMI 375 - SUPREME COURT we are of the considered view that the excise refund is in the nature of revenue receipt forming part of the profit and gains arising from the business and as such cannot be reduced from the cost of plant machinery. In these circumstances the contentions raised by the ld. DR for the Revenue are not sustainable. CIT(A) passed the impugned order by following the earlier years order passed by his predecessor subsequently confirmed by the Tribunal by rightly reaching the conclusion that the assets acquired by demerged company M/s. Dharampal Satyapal Ltd. out of the amount of excise duty refund accounted as deferred Government grants in its books of account does not carry any force to make reduction in the cost of assets and thereby deleted the addition made on account of disallowance of depreciation . Consequently finding no illegality or infirmity in the impugned order passed by the ld. CIT (A) the appeal filed by the Revenue is hereby dismissed.

Summary

Issues Involved:
1. Disallowance of depreciation under Section 32(1) read with Section 43(1) of the Income-tax Act.
2. Classification of excise refund as a revenue receipt and its impact on the cost of plant and machinery.

Detailed Analysis:

Issue 1: Disallowance of Depreciation under Section 32(1) read with Section 43(1) of the Income-tax Act
The Revenue challenged the deletion of an addition of Rs. 3,54,59,399/- made by the Assessing Officer (AO) on account of disallowance of depreciation. The AO had observed that the assets on which depreciation was claimed were acquired using Government grants (excise duty exemptions) by the demerged company. Consequently, the AO held that the actual cost of these assets should be considered nil as per Section 43(1) of the Act, and thus, reduced the cost of assets by Rs. 78,32,12,592/-. This led to a recomputation of the depreciation, allowing only Rs. 20,37,338/- and disallowing Rs. 3,54,59,399/-.

The Commissioner of Income-tax (Appeals) [CIT(A)] deleted this addition, relying on the decisions of the coordinate Bench of the Tribunal in the assessee's own case for previous assessment years (2010-11, 2011-12, 2012-13, and 2013-14). The Tribunal upheld the CIT(A)'s decision, stating that the excise refund is a revenue receipt and not a capital subsidy, and therefore, cannot be reduced from the cost of plant and machinery.

Issue 2: Classification of Excise Refund as Revenue Receipt
The Revenue argued that the CIT(A) erred in holding that the excise refund, being a revenue receipt, cannot be reduced from the cost of plant and machinery. The Revenue cited the Supreme Court decision in CIT vs. Meghalaya Steels Ltd., which held that excise duty refund is a revenue receipt forming part of profits and gains arising from business. The AO contended that the assets were acquired using excise duty exemptions, classified as deferred Government grants, and thus, the cost of these assets should be reduced by the amount of the grant.

The CIT(A) and the Tribunal found that the excise refund is derived from the manufacturing activities and purchasing the assets from this refund is an application of profits. The excise refund is a revenue receipt and cannot be reduced from the cost of plant and machinery. This interpretation aligns with the Supreme Court's ruling in the Meghalaya Steels Ltd. case, which classified excise refunds as revenue receipts forming part of taxable income.

Conclusion
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance of depreciation. The Tribunal reiterated that the excise refund is a revenue receipt and cannot be reduced from the cost of plant and machinery. The decision was consistent with prior rulings in the assessee's own case and the Supreme Court's decision in CIT vs. Meghalaya Steels Ltd. Consequently, the Tribunal found no illegality or infirmity in the CIT(A)'s order, thereby upholding the deletion of the addition made by the AO.