2005 (5) TMI 234 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of the subsidy received by the assessee.
2. Disallowance of depreciation on moulds.

Issue-wise Detailed Analysis:

1. Taxability of the Subsidy Received by the Assessee:

Facts:
- The assessee received subsidies of Rs. 20 lakhs and Rs. 40 lakhs for the assessment years 1996-97 and 2001-02, respectively, from the State Government of Gujarat.
- The assessee claimed these subsidies as exempt from income-tax, treating them as capital subsidies.

Assessment Officer's (AO) Conclusion:
- The AO treated the subsidies as revenue receipts, arguing that the subsidies were linked to the production and sales activities of the assessee.
- The AO cited conditions such as the necessity for the unit to supply dies and moulds to vendors within Gujarat, and the commencement of business, to support the revenue nature of the subsidies.
- The AO referenced the Supreme Court decision in Sahney Steel & Press Works Ltd. vs. CIT, which held that subsidies received after commencement of business are revenue in nature.

CIT(A)'s Decision:
- The CIT(A) reversed the AO's decision, stating that the subsidies were capital in nature, aimed at assisting the assessee in setting up an industry in a backward area.
- The CIT(A) highlighted that the subsidies were granted as per the State Government's policy to develop backward areas and were based on the fixed capital investment made by the assessee.

Tribunal's Analysis:
- The Tribunal reviewed the resolutions and schemes under which the subsidies were granted, noting that they were titled "Capital Investment Subsidy Scheme for New Industries."
- The Tribunal observed that the subsidies were intended to support the establishment of the industry and not its operational activities.
- The Tribunal cited various judicial precedents supporting the capital nature of such subsidies, including decisions from the High Courts of Allahabad, Punjab & Haryana, Madras, and Kerala.
- The Tribunal concluded that the subsidies were capital subsidies and not liable to tax.

Final Judgment:
- The Tribunal confirmed the CIT(A)'s orders, holding that the subsidies received by the assessee in both years were capital subsidies and not taxable.

2. Disallowance of Depreciation on Moulds:

Facts:
- The assessee claimed 40% depreciation on moulds used in plastic and rubber industries, instead of 25%.
- The AO disallowed the higher depreciation rate, arguing that the assessee's products were not wholly made of plastic or rubber.

CIT(A)'s Decision:
- The CIT(A) allowed the higher depreciation rate, referencing a similar issue decided in favor of the assessee for the assessment year 1991-92.
- The CIT(A) noted that the assessee used its moulds in plastic goods factories, qualifying for the higher depreciation rate.

Tribunal's Analysis:
- The Tribunal followed its own decision in the assessee's case for the assessment year 1996-97, where it had upheld the CIT(A)'s order allowing the higher depreciation rate.
- The Tribunal confirmed that the assessee was entitled to depreciation at 40% on plastic moulds.

Final Judgment:
- The Tribunal upheld the CIT(A)'s decision, directing the AO to delete the disallowance of Rs. 42,08,947 on account of depreciation on moulds.

Conclusion:
- Both appeals by the Revenue were dismissed.
- The subsidies received by the assessee were held to be capital subsidies and not taxable.
- The assessee was entitled to a higher depreciation rate of 40% on plastic moulds.