2020 (11) TMI 418 - AT - Income Tax

Valuation of assets - Reducing the amount of subsidy from the value of assets for the purpose of granting depreciation - HELD THAT - With the above amendments, subsidy falls within the definition of income u/s 2(24) and resultantly chargeable to tax in the year of receipt as per section 145B(3) in all cases except where Explanation 10 to section 43(1) gets magnetized, in which eventuality, it will go to reduce the cost of assets. The contention of the ld. DR about either the reduction of the amount of subsidy from the cost of assets in terms of the Explanation 10 or treating it as chargeable to tax will gain relevance in the periods covered by the afore discussed amendments. Since such amendments are not applicable to the year under consideration, the case will be governed by the ratio decidendi in the judicial precedents discussed supra. We are satisfied that the ld. CIT(A) was not justified in directing to exclude the amount of subsidy allowed to the assessee by the States of Jharkhand and Maharashtra from the cost of assets for the purposes of allowing depreciation. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of subsidy as capital or revenue in nature.
2. Reduction of subsidy amount from the value of assets for depreciation.

Analysis:

Issue 1: Treatment of subsidy as capital or revenue in nature

The case involved cross-appeals by the assessee and the Revenue regarding the treatment of a subsidy received by the assessee from the Governments of Jharkhand and Maharashtra. The Assessing Officer treated the subsidy as revenue, but the CIT(A) held it to be of capital nature. The Tribunal, considering the purpose of the subsidy to accelerate industrial development, upheld the subsidy as capital, citing a similar decision in the assessee's previous case. The Tribunal emphasized that the subsidy's purpose determines its nature, and since the subsidy was for industrial development, it was rightly classified as capital. The Tribunal ruled in favor of the assessee, following precedent and rejecting the Revenue's appeal.

Issue 2: Reduction of subsidy amount from the value of assets for depreciation

The second issue revolved around the direction of the CIT(A) to reduce the subsidy amount from the value of assets for depreciation, citing Explanation 10 to section 43(1) of the Income-tax Act. The Tribunal analyzed the Explanation, which applies when the government subsidizes the cost of an asset directly or indirectly. However, in cases where the subsidy aims to accelerate industrial development, it does not qualify for reduction from the cost of assets. Referring to relevant judicial precedents, the Tribunal concluded that the subsidy received by the assessee did not meet the criteria for reduction under Explanation 10. Additionally, the Tribunal highlighted amendments in the Finance Acts, stating that subsidies are now considered income and taxable unless falling under specific exemptions. As the amendments were not applicable for the year in question, the Tribunal upheld the assessee's appeal, dismissing the Revenue's claim for reduction of subsidy amount from asset value for depreciation.

In conclusion, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, emphasizing the nature and purpose of the subsidy in determining its tax treatment and depreciation implications. The judgment provided a detailed analysis of the legal provisions, precedents, and relevant amendments to support its decision.