2020 (9) TMI 617 - AT - Income Tax

Disallowance of depreciation - capital subsidy received under Technology Upgradation Fund (TUF) scheme - Determination of value as per the Explanation 10 to Section 43(1) - HELD THAT - Respectfully following the various decisions relied upon by the ld. CIT(A) and the decision of the Hon ble Supreme Court in the case of Ponni Sugars 2008 (9) TMI 14 - SUPREME COURT and in the facts and circumstances of the case, we do not find any infirmity in the order of the ld. CIT(A) deleting the disallowance of depreciation on capital subsidy and accepting the plea of the assessee that the said capital subsidy need to be directly credited only to capital reserve and not to be reduced from the value of plant and machinery as per Explanation-10 to Section 43(1) of the Act. Whether the CIT(A) was justified in treating the interest subsidy received by the assessee under TUF scheme as a capital receipt? - CIT(A) had categorically observed that the object of the TUF subsidy was to increase the competitiveness in the textile industry and not to increase the profits and hence the said interest subsidy deserves to be treated only as a capital receipt. Similarly, we have also observed that the interest subsidy given under the State Government scheme was also meant for promoting the industry in the area which also deserves to be treated only as a capital receipt. Hon ble Rajasthan High Court in the case of PCIT vs. Nitin Spinners Ltd., 2019 (9) TMI 1154 - RAJASTHAN HIGH COURT had under similar facts and circumstances held these receipt of subsidies to be capital receipts - Decided against revenue.

Summary

Issues: Disallowance of depreciation on capital subsidy received under Technology Upgradation Fund (TUF) scheme; Treatment of interest subsidy received under TUF scheme as a capital receipt.

Analysis:
1. The appeals for A.Y.2013-14 & 2014-15 arose from the order of the ld. Commissioner of Income Tax (Appeals) against the assessment order passed by the ld. DCIT-4(3)(1), Mumbai. The primary issue was the deletion of depreciation disallowance on capital subsidy received under the TUF scheme and the treatment of interest subsidy as a capital receipt.

2. The assessee, a manufacturing company, received a capital subsidy of &8377; 4.54 lakhs under the TUF scheme. The ld. CIT(A) held that the subsidy was not linked to any specific asset and thus, not subject to depreciation reduction as per Explanation 10 to Section 43(1) of the Act. The ld. CIT(A) relied on various judicial precedents to support this decision, emphasizing the purpose of the subsidy over its measurement.

3. Regarding the interest subsidy received, the assessee argued for its treatment as a capital receipt, supported by the purpose of the subsidy to enhance competitiveness in the textile industry. The ld. CIT(A) agreed, citing relevant case laws and high court decisions that upheld similar treatment of subsidies. The purpose of the subsidy was deemed crucial in determining its nature as capital or revenue.

4. The Tribunal concurred with the ld. CIT(A)'s findings, emphasizing the purpose test in subsidy cases. Relying on legal precedents and the decision in Ponni Sugars case, the Tribunal upheld the deletion of depreciation disallowance on the capital subsidy and the treatment of interest subsidy as a capital receipt. The decision for A.Y.2013-14 was deemed applicable for A.Y.2014-15 as well, with only variations in figures.

5. Ultimately, both appeals of the revenue were dismissed, affirming the orders of the ld. CIT(A) regarding the treatment of subsidies as capital receipts based on their intended purpose and in line with relevant legal interpretations and precedents.