2017 (11) TMI 1353 - AT - Income Tax

Treatment to subsidy - revenue or capital receipt - Held that - Hon ble Supreme Court in CIT vs. Ponni Sugar & Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT) has laid down that the purpose test should be applied for determining the character of subsidy. If the subsidy is given for expansion etc., then, it is a capital receipt irrespective of the fact that it is given in the form of more open quotas etc. We find it as an admitted position that the assessee received this amount as a quid pro quo for setting up of its unit in West Bengal. The same, being, allowed for setting up of industry has been rightly held by the ld. CIT(A) to be capital receipt. The impugned order is confirmed. This ground fails. Addition on account of capitalization of interest - Held that - In view of this clear proviso set out in section 36(1)(iii), it becomes abundantly clear that any interest paid in respect of capital borrowed for acquisition of asset shall not be allowed as deduction for the period till such asset is first put to use. Since the Pineapple unit of the assessee was not admittedly operational throughout the year, interest on capital borrowed for acquisition of assets meant for the Pineapple unit cannot be allowed as deduction till such assets are put to use. No such details are available with the ld. AR. In the given circumstances, we set aside the impugned order to this extent and remit the matter to the file of Assessing Officer for examining the amount of interest paid by the assessee on capital borrowed for acquisition of fixed assets. Amount of interest pertaining to the period up to the which such assets of Pineapple unit were not first put to use, shall not be allowed as deduction. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this case. Addition on account of administrative expenses - Following the view taken for disallowing interest, the Assessing Officer opined that no business activity took place till August, 2004 and hence 2/3rd of the Selling and Administrative expenses were to be capitalized on pro-rata basis - Held that - While disposing off ground no. 2 of the Revenue s appeal, we have modified the finding of the ld. CIT(A) regarding setting up of the business in the preceding year by holding that only the Mango pulp business was set up and the Pineapple business was in the process of being setting up which the assessee claims to have been actually set up in July, 2004. In view of this fact, the expenses relating to Pineapple unit are required to be capitalized and those relating to Mango pulp unit should be allowed as deduction. Reduction of the amount of subsidy under West Bengal Incentive Scheme, 2000 from the value of fixed assets for the purposes of granting deduction - Held that - Nothing happened in the year under consideration so as to justify the action of reduction from the written down value of the block of assets. Explanation 10 to sub-section (1) of section 43 of the Act came into effect only from 1.4.1999 that too prospectively and, therefore, has no application, more so, when plant itself was set-up in assessment year 1993-94. Since in the instant case, the assets relating to the Pineapple unit were acquired/set up much later than the date of applicability of Explanation 10 and as per the version of the ld. AR the project became ready for operations in July, 2005, we find that the mandate of Explanation 10 to section 43(1) gets fully attracted. The decision in Banco Products (2015 (10) TMI 1282 - GUJARAT HIGH COURT), therefore, supports the Revenue s stand point instead of the assessee. It is ergo held that the amount of subsidy received by the assessee to the tune of ₹ 2.50 crore will require reduction from the cost of acquisition of the assets and would consequently lower the amount of depreciation as has been held by the lower authorities. The impugned order is countenanced on this score. The ground of the assessee fails.

Summary

Issues:
1. Treatment of subsidy as capital in nature.
2. Addition of interest on account of capitalization.
3. Deletion of addition of administrative expenses.
4. Reduction of subsidy under West Bengal Incentive Scheme from fixed assets.

Issue 1: Treatment of subsidy as capital in nature:
The case involved an appeal regarding the treatment of a subsidy of ?2.5 crore as capital in nature, received by the assessee from the West Bengal Government. The Assessing Officer considered it as revenue, but the CIT(A) overturned this decision. The tribunal analyzed the purpose of the subsidy and referred to relevant Supreme Court judgments. It was established that the subsidy was received for setting up an industry, making it a capital receipt. The tribunal upheld the CIT(A)'s decision, confirming the subsidy as capital in nature.

Issue 2: Addition of interest on account of capitalization:
The Revenue appealed against the deletion of an addition of ?1,68,33,194 made by the Assessing Officer for capitalization of interest. The tribunal noted that the business had commenced in the previous assessment year, as accepted by the Assessing Officer. Therefore, it was held that no disallowance of interest was warranted for assets already in use. However, heavy additions to fixed assets during the year raised concerns. The tribunal remitted the matter to the Assessing Officer to examine interest paid on capital borrowed for assets not yet in use.

Issue 3: Deletion of addition of administrative expenses:
The Revenue contested the deletion of an addition of ?41,18,347 made by the Assessing Officer for administrative expenses. The tribunal modified the CIT(A)'s finding, stating that only the Mango pulp business was set up in the preceding year, while the Pineapple business was in the process. Expenses related to the Pineapple unit were to be capitalized, and those related to the Mango pulp unit allowed as deduction.

Issue 4: Reduction of subsidy under West Bengal Incentive Scheme from fixed assets:
The assessee challenged the reduction of a subsidy under the West Bengal Incentive Scheme from the value of fixed assets. The tribunal examined relevant legal precedents, including the Hon'ble Supreme Court's judgment and Explanation 10 to section 43(1). It was concluded that the subsidy should be reduced from the cost of acquisition of assets, in line with Explanation 10. The tribunal upheld the reduction of the subsidy from fixed assets, dismissing the assessee's appeal.

In conclusion, the tribunal partly allowed the Revenue's appeal for statistical purposes and dismissed the assessee's appeal. The detailed analysis of each issue provided clarity on the treatment of subsidy, addition of interest, deletion of administrative expenses, and reduction of subsidy from fixed assets, based on legal interpretations and factual circumstances.