2014 (4) TMI 1084 - AT - Income Tax

Disallowance u/s 43(1) - CIT(A) deleted the disallowance on account of depreciations - whether A.O. correctly made the said disallowance by applying Explanation-10 to section 43(1)? - Held that - In order to invoke Explanation 10, it is necessary to show that the subsidy was directly or indirectly used for acquiring an asset. This is again a question of fact. The relatable subsidy to such asset can be reduced from the cost only if it is found that the cost for acquiring that asset was directly or indirectly met out of the subsidy.Likewise in the proviso, it is necessary to show that the subsidy has been directly or indirectly used to acquire an asset but it is not possible to exactly quantify the amount directly or indirectly used for acquiring the asset. Here also, a finding of fact is necessary that an asset was acquired by directly or indirectly using the subsidy. The above Explanation and the proviso thereto do not dilute the finding of the Hon ble Supreme Court in the case of P. J. Chemicals Ltd. 1994 (9) TMI 1 - SUPREME Court that asset-wise subsidy alone can be reduced from the actual cost. The above Explanation and the proviso therein attempt to explain the law. They are not bringing any new law different from the law considered by the Hon ble Supreme Court in the above cases. CIT(A) has rightly allowed the claim of depreciation of assessee. We uphold the same. - Decided against revenue. Disallowance of expenses at 1% of exempted income by invoking the provisions of section 14A - Held that - We find that the relevant assessment year involved is 2007-08 and Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein it is held that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. The CIT(A) restricted the disallowance at 1% of the exempted income u/s. 14A of the Act. We find no infirmity in the order of CIT(A) and hence, the same is confirmed. - Decided against revenue.

Summary

Issues Involved:
1. Depreciation Disallowance under Explanation (10) to Section 43(1) of the Income-tax Act, 1961.
2. Disallowance of Expenses under Section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Depreciation Disallowance under Explanation (10) to Section 43(1):

The first issue pertains to the disallowance of Rs. 60,68,025/- on account of depreciation by the Assessing Officer (AO) by applying Explanation (10) to Section 43(1) of the Income-tax Act, 1961. The assessee company received Rs. 4,50,07,248/- as incentive subsidy from the Government of West Bengal under the West Bengal Incentive Scheme, 1999, for setting up industrial projects. The subsidy was restricted with reference to the value of fixed capital invested in land, building, and plant & machinery but was not intended to subsidize the cost of any fixed assets. Hence, the assessee did not reduce the subsidy from the actual cost/WDV of fixed assets for computing depreciation. The AO allocated the subsidy to various fixed assets and reduced the depreciation claimed, asserting that the subsidy was reimbursement against the cost of assets.

The CIT(A) allowed the assessee's claim, noting that the subsidy was considered a capital receipt in previous assessments for AY 2003-04 and 2004-05, without reducing it from the cost of assets for depreciation calculation. The CIT(A) relied on the Supreme Court judgment in CIT vs. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC), which held that government subsidies intended as incentives for industrial development do not partake the character of payment to meet the actual cost of assets.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the subsidy was not directly or indirectly used to acquire any asset, and thus, should not reduce the actual cost for depreciation purposes. The Tribunal also referenced the Supreme Court's interpretation that asset-specific subsidies reduce the actual cost, but general industrial incentives do not.

2. Disallowance of Expenses under Section 14A:

The second issue involves the disallowance of expenses under Section 14A of the Income-tax Act, 1961. The assessee derived dividend income of Rs. 27,16,737/- and Long Term Capital Gain of Rs. 81,03,426/-, claiming them as exempt under Sections 10(34) and 10(38) respectively. The AO invoked Section 14A read with Rule 8D, disallowing Rs. 11,30,790/-. The CIT(A) restricted the disallowance to 1% of the exempted income.

The Tribunal confirmed the CIT(A)'s decision, noting that for AY 2007-08, Rule 8D is not applicable retrospectively as per the Bombay High Court ruling in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.). The Tribunal found no infirmity in the CIT(A)'s order and upheld the restriction of disallowance to 1% of the exempted income.

Conclusion:

The appeal by the revenue was dismissed on both issues. The Tribunal upheld the CIT(A)'s decisions, allowing the depreciation claim without reducing the subsidy from the cost of assets and restricting the disallowance under Section 14A to 1% of the exempted income.