2020 (12) TMI 448 - AT - Income Tax

Depreciation on computer hardware - whether Depreciation as section 43 does not require establishing any direct relationship between the assistance received under ( ) utilization of the same in purchase of assets? - CIT(A) was of the view that the amount was given by the GoI for recapitalization, Further, that the same had been utilized for purchasing computers was also not established - HELD THAT - We are unable to place much store on the contention that the amount received being neither a subsidy nor grant nor reimbursement , the section is inapplicable. The argument as to the provision being applicable only when the unit is set-up and not to a running concern, is without any basis either on facts or in law. We have already clarified that it is the nature of the sum, determined by the purpose for which it is given, that is relevant and determinative of the matter. As long as it is for meeting the cost of an asset, directly or indirectly, it is irrelevant whether the asset purchased or setup is at the commencement of the operations or by way of a substantial expansion or even in the regular course of business; a business enterprise being required to constantly upgrade itself as well as to replace the assets which have over time become obsolete, technologically or functionally, or otherwise worn out through user. The argument is de hors the express provision of law and, consequently, without reference to any judicial precedent. We do not consider the provision of s. 43(1) as applicable in the facts and circumstances of the case. There is nothing to show of any proposal for the acquisition of fixed assets. Rather, the capital infusion is a part of an all India exercise, undertaken covering all RRBs across India, under the aegis of RBI NABARD, under whose administrative control the RRBs function, to improve their capital adequacy. The non-issue of shares would have no material bearing in the matter as it does not, in view of contributions proportionate to their respective shareholdings, disturb the ratio of either their voting rights or the proportion of the risk borne by the promoters, the providers of the risk capital. While, therefore, it is not correct to say that the funds were not meant for computers, being an eligible asset of the business, acquired for its purposes, it also cannot be said that the same is for meeting their cost, even as we have found that the same is not a relevant consideration in the instant case inasmuch as the same do not qualify to be a subsidy, grant, reimbursement, or the like. Raising funds to finance the acquisition of the assets, it cannot be said to be toward meeting the cost of the asset to be acquired therefrom, whether directly or indirectly, i.e., within the meaning of the same u/s. 43(1), and for which we may also advert to the word context referred to in s. 43, i.e., prior to sub-section (1), so that it is only where the context admits thereof that the definition provided therein is to be adopted. The occasion to examine the scope of word indirectly , appearing both in section 43(1) as well as in Explanation 10 thereto, therefore, does not arise for consideration in the facts of the case. Cost , it attributes, as well as whether the same has been met directly or indirectly, in the facts of the case, by any person or authority, are essentially questions of fact. Qua the law in the matter, Explanation 10 read with proviso thereto clarifies that even where the grant, etc., is not specifically provided for that purpose, if it results in or leads to the cost of the asset being met by another, the same has to be given effect to. Surely, the same is not applicable in the facts and circumstances of the case. No portion of the cost of the computer hardware (i.e., ₹ 1779.09 lacs) can be said to be, in law or on facts, met by the capital contribution of ₹ 20 cr. to any extent, for its actual cost to the assessee-bank being reduced with reference to it. Decided against revenue.

Summary

Issues Involved:

1. Whether the deletion of an addition of ?5,33,72,693/- on account of depreciation claim was justified under Section 43 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Justification of Deletion of Addition on Account of Depreciation Claim:

The Revenue's appeal was against the order of the Commissioner of Income Tax (Appeal)-1, Jabalpur, which had partly allowed the assessee's appeal contesting its assessment under Section 147 read with Section 143(3) of the Income Tax Act, 1961, for the Assessment Year 2012-13. The sole issue raised was whether the Commissioner had erred in deleting the addition of ?5,33,72,693/- on account of a claim of depreciation. The Revenue argued that Section 43 does not require establishing a direct relationship between the assistance received and the utilization of the same in the purchase of assets.

Facts and Background:

The assessee, a Regional Rural Bank (RRB), received a capital support of ?20 crores during the financial year 2011-12 from the Government of India to maintain capital adequacy. The assessee purchased computer hardware for ?1779.09 lacs during the relevant year and claimed depreciation on it. The Assessing Officer (AO) disallowed the depreciation claim, invoking Section 43(1) read with Explanation 10, which mandates that the actual cost of an asset should be reduced by any subsidy or grant received for its purchase.

Revenue's Argument:

The Revenue contended that the bank, facing a shortage of capital, would not have been able to purchase the computer system without the capital grant received. They argued that it was the bank's responsibility to prove that the funds received were not used for purchasing computers. The Revenue relied on the decision in CIT vs. Shree Renuka Sugars Ltd., where the Karnataka High Court had held that the subsidy received for commissioning a power plant should reduce the cost of the asset.

Assessee's Argument:

The assessee argued that the capital support was received to improve the Capital to Risk weighted Assets Ratio (CRAR) and not specifically for purchasing computers. They claimed that the decision in Shree Renuka Sugars Ltd. was not applicable as the subsidy in that case was specifically for asset acquisition, whereas in their case, the capital support was for recapitalization. The assessee also contended that even if the funds indirectly financed the asset purchase, the reduction in cost should be proportionate.

Tribunal's Analysis:

The Tribunal observed that the finding by the Commissioner was inconclusive. If the Commissioner believed that the AO needed to establish a nexus between the funds and their utilization for computers, it was incumbent upon the Commissioner to either establish this nexus or seek a remand report from the AO. The Tribunal noted that the appellate authority has the jurisdiction and duty to correct all errors in the proceedings under appeal and to issue appropriate directions.

Legal Analysis:

Section 43(1) provides for a reduction in the cost of an asset to the extent that it is met by any other person or authority. Explanation 10 clarifies that if the cost is met by another, directly or indirectly, it should be reduced. The Tribunal found that the Commissioner's order did not address whether a nexus was required to be established. The Tribunal also noted that the AO was constrained for want of necessary details, such as a cash-flow statement from the assessee.

Merits of the Case:

The Tribunal found that the assessee's argument that the capital support was not a subsidy, grant, or reimbursement was not convincing. The Tribunal clarified that it is the purpose for which the funds were given that is relevant. The Tribunal noted that the capital infusion was part of an all-India exercise to improve the capital adequacy of RRBs and was not specifically for purchasing fixed assets.

Conclusion:

The Tribunal concluded that the provision of Section 43(1) was not applicable in the facts and circumstances of the case. The funds were provided as risk capital to improve the bank's capital adequacy and were not specifically for meeting the cost of any asset. Therefore, no portion of the cost of the computer hardware could be said to be met by the capital contribution. The Tribunal dismissed the Revenue's appeal.

Result:

The Revenue's appeal was dismissed.