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TMI Blog2014 (12) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and circumstances of the case, the learned CIT(Appeals) though holding that Sales-tax incentive of Rs. 1238000 allowed by the State Govt. is the nature of capital receipt but erred in directing the Assessing Officer (AO) for reduce the same from the cost of Fixed Assets for the purpose of computing depreciation by applying the Explanation 10 of Sec. 43(1) of I.T. Act. Revenue has raised following ground No.2:- 2. That Ld. CIT(A)-VI Kolkata has erred in law as well as on facts by deleting the addition made by the AO on account of Sales Tax subsidy received by the assessee as revenu9e income of Rs. 12,38,000/-." 3. Briefly stated facts are that the assessee is engaged in the business of production of cement and its unit is at Chittorgarh, Rajasthan, which received sales tax subsidy under a scheme of the Rajasthan Government. The assessee claimed that an amount of Rs. 12.38 lakhs was related to sales tax exemption granted by the State Government and therefore, being a capital receipt it should be excluded from sales for computing total income under the Act. The AO noted that normally for the units which do not enjoy such exemption the assessee reduces the sales tax component fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Kolkata for A.Yrs. 2004-05 and 05-06, for this year also I decide this issue in favour of the assessee. But CIT(A) applied Explanation 10 to section 43(1) of the Act and directed the AO that subsidy amount be reduced from the actual cost of the fixed assets for calculating depreciation allowable under the Act. For this he held as under: 6.4 Having held that the above Sales Tax subsidy of Rs. 12,38,000/- is a capital subsidy, I would like to draw attention to Explanation reads as follows: 'Explanation 10 - where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating allowable depreciation. Since the Ld A/Rs have accepted applicability of Explanation 10 u/s 43(1) for the above two subsidies which are claimed as capital receipts, therefore, for the subsidy received under the Rajasthan State Tax Exemption Scheme 1998 which has been held as capital receipt by the Hon'ble ITAT also the same principle will apply. In view of the above discussion I hold that the subsidy amount of Rs. 12,38,000/- received under the Rajasthan S T Exemption Scheme of 1998 is capital in nature but this subsidy amount will be covered by the provisions of Explanation 10 u/s 43(1) and therefore it should be reduced from the actual cost of the fixed assets for calculating depreciation allowable under the I.T. Act." Aggrieved, both revenue and assessee, came in second appeal before Tribunal. 5. Before us Ld. Senior Advocate Shri J P Khaitan on behalf of assessee argued that the sales tax incentive received by the assessee-company relates to its unit for expansion, which was completed on 31-01-2001 and same is covered under Rajasthan Sales Tax Exemption Scheme, 1978 under Rajasthan Sales Tax and Central Sales Tax Act. He argued that overall limit of exemption is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Act. 7. We have heard rival contentions on this issue and gone through the facts and circumstances of the case. We find that the facts are discussed in detail and which are undisputed. It is admitted that the assessee's issue of Sales Tax Incentive is capital in nature for the reason that the very scheme under which the expansion of the unit and subsidy under Rajasthan Sales Tax Scheme, 1998 was received explains the purpose of the scheme as incurring capital expenditure for installation of plant and machinery and for eligible for fixed capital investment. Even the issue of assessee is covered in its favour by Tribunal's decision in assessee's own case all along from AYs 2002-03 to 2006-07. It is not brought to our notice by the Revenue that the matter has been decided by Hon'ble Calcutta High Court, despite a query from the Bench. In such circumstances, and taking a consistent view, we hold that the CIT(A) has rightly treated the sales tax subsidy receipt as 'capital in nature'. 8. In respect to the issue of application of Explantion-10 to Sec.43(1) of the Act we find from the facts of the case that the Rajasthan Govt. has framed a incentive scheme i.e., R.S.T/C.S.T. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled on the subject. Now, the only wavering is with reference to Explanation 10 provided under sec.43(1) of the Act. The said Explanation provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. It is further, provided thereunder, that where such subsidy or grant or reimbursement of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee. In order to invoke Explanation 10, it is necessary to show that the subsidy was directly or indirectly used for acquiring an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the second proviso to Sec. 32(1) of the Act. During the current financial year 2006-07 relevant to AY 2007-08, the year under consideration, the assessee claimed additional depreciation (balance 50%) on the same plant and machinery as it was entitled to get balance additional depreciation this year also. The AO disallowed the claim by observing that "However, contesting to the assessee claim, it can be said that nowhere in the act it has been provided that balance 50% of further depreciation can be claimed in the subsequent year if the assessee had claimed initial 50% of further depreciation in the year of purchased because of used for less 180 days in terms of proviso to sec. 32(1). Accordingly the claim for further depreciation to the extent of Rs. 13,39,63,209/- pertaining to additions made during Assessment Year 2006-07 and used for period of less than 180 days is not accepted." Aggrieved, assessee preferred appeal before CIT(A). 12. The CIT(A) confirmed the action of the AO by observing in para-7.3 as under:- "7.3 I have considered the above submission of Ld. AR. The first argument of the Ld. AR is that in Clause (iia) of Sec. 32(1) as introduced by Finance Act 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which he is eligible for the incentive as per law. But if the assessee is not eligible in any other year for such incentive it cannot be allowed. As per the provisions of Sec. 32(1)(iia) the assessee was eligible for initial depreciation in the assessment year 2006-07. It claimed this additional depreciation in that year but could be allowed only 50% of the additional depreciation since the new plant and machinery were put to use for a period less than 180 days in the relevant previous year. The remaining 50% of the initial depreciation cannot be allowed in the subsequent assessment year i.e. asst. year 2007-08 because in this asstt. year the plant and machinery are not new and there is no provision under the IT Act to allow such depreciation in the subsequent year also. In view of the above discussion I dismiss this ground of the assessee." Aggrieved, assessee is in second appeal before Tribunal. 13. Before us, Ld. senior counsel for the assessee pointed out that second proviso to section 32(1)(ii) of the Act restricts the additional depreciation to 50% in case the machinery and plant was put to use for the purpose of business or profession for a period less than 180 days. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. According to him, when the main provision which allows depreciation @ 20% and does not prescribe any particular year in which it has to be allowed, the intention of the legislature is to allow entire additional depreciation @ 20%. The second proviso to section 32(1)(ii) is to mean that 10% should be allowed in the year in which the machinery is acquired and installed and the balance 10% has to be impliedly allowed in the subsequent year. 14. On the other hand, Ld. CIT, DR Shri Ravi Jain stated that the assessee is entitled for additional depreciation u/s. 32(1)(iia) of the Act in respect of new machinery and plant and depreciation has to be granted only in the year in which machinery was put to use. According to him, if the machinery was put to use for less than 180 days and in that case assessee is entitled only for 50% of additional depreciation and the benefit cannot be carried forward for next year for allowance in the next year. According to him, there is no provision in the Act to carry forward the allowable depreciation when the assessee has sufficient profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws that the assessee is eligible for additional depreciation in case the new machinery and plant was acquired and installed after 31-03-2005. There is no restrictive condition in the clause for the eligibility of the assessee to claim additional depreciation. When the assessee is eligible for depreciation @ 20%, in the absence of any specific provision, the AO cannot cut down the scope of deduction by referring to second proviso to section 32(1)(ii) of the Act. He also pointed out that even if there is any contradiction between sections 32(1)(iia) and second proviso to section 32(1)(ii), it has to be reconciled so as to give harmonious effect to the legislative intent. The benefits conferred on the assessee by way of incentive provision cannot be taken away by adopting an implied meaning to second proviso to section 32(1)(ii) of the Act. Since the second proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50% depreciation in the subsequent year, second proviso to section 32(1)(ii) shall not be interpreted to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. We are of the view that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant is acquired and installed after 31-03-2005. Proviso to section 32(1)(iia) says hast if the machinery was acquired by the assessing during the previous year and has put to use for the purpose of business less than 180 days, the deduction shall be restricted to 50% of the amount calculated at the prescribed rate. Therefore, if the machinery is put to use in any particular year, the assessee is entitled for 50% of the prescribed rate of additional depreciation. The Income-tax Act is silent about the allowance of the balance 10% additional depreciation in the subsequent year. Taking advantage of this position, the assessee now claims that the year in which the machinery was put to use the assessee is entitled for 50% additional depreciation since the machinery was put to use for less than 180 days and the balance 50% shall be allowed in the next year since the eligibility of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(1)(ii) of the Act." 17. The ld. senior counsel also relied on the decision of the Delhi Bench of this Tribunal in the case of DCIT vs. Cosmo Films Ltd. 139 ITD 628 (Del) and in the case of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance 50% will not be allowed in succeeding year. The extra depreciation allowable u/s. 32(1)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage./ The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of machinery and plant. In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit. We allow ground no.2 of the assessee's appeal. Since we have decided ground no.2 in favour of assessee, there is no need to decide the alternative claim raised in ground no.3. The same is dismissed." 18. In view of the above discussion and considering the orders of coordinate Benches, cited supra, we are of the considered view that the assessee is entitled for additional depreciation u/s. 32(1)(iia) of the Act in this assessment year also. We direct the AO accordingly. 19. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of the AO in treating the interest subsidy received from the state government as reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 306 ITR 396. Ld. AR has claimed that in this decision Hon'ble Apex court has analyzed its earlier decision in the case of Sahney Steel and has clarified the criteria to be followed for deciding whether any subsidy or assistance is to be treated as capital or revenue. According to ld AR Hon'ble Apex Court has held that the main criteria for deciding nature of any subsidy should be the purpose for which such subsidy is given. In his submission reproduced above Ld. AR has summarized salient features of this scheme of Rajasthan Government and on the basis of these he has claimed that the main purpose of this scheme was to enable the assessee to set up a new unit or to expand its existing unit. The scheme required that for setting up new unit or expanding the existing unit the investment should be made by taking term loan from financial institution/scheduled banks. The loan/borrowing from the financial institution/bank should be for creation of fixed assets and not for working capital, over draft and current liabilities. On the basis of these features of the incentive scheme of Rajasthan Government Ld. AR claimed that the nature of the subsidy received under this scheme would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m SBI and SBBJ. The assessee is paying interest on this loan @ 8% per annum. The subsidy is given to the assessee @ 5% of the loan amount used for setting up the captive power plant. The 5% of this loan amount comes to Rs. 2,02,45,163/- which has been allowed as a subsidy to the assessee under this scheme of Rajasthan Government. From these facts first of all it can be seen that the assessee has not carried out any expansion of its existing plant. The whole of the subsidy has been given in respect of setting up of a captive power plant which cannot be said to be in the nature of expansion. Secondly, in case of this particular scheme it is important t note that this scheme has been termed as a scheme of interest subsidy. Under this scheme an assessee becomes eligible only when it borrows funds from banks/financial institutions etc. for investing in the new industry/expansion/modernization allowed under this scheme. The subsidy amount is calculated @ 5% of the funds borrowed for use in the projects allowed under this scheme. The subsidy9 is give only till the assessee pays interest on the borrowed funds. If no interest is payable then the subsidy will not be allowed to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of 50% of additional amount of sales tax under Rajasthan Sales Tax Act and Central Sales Tax Act or VAT payable or deposited by the unit over and above the highest tax payable or deposited in any of the three preceding years immediately, whichever is higher. According to him, the interest subsidy shall be 5% of maximum side. He explained the purpose for giving subsidy to ensure that company makes investment in expansion/modernization. The present case carries rate of loan @ 8% on loan and subsidy is available for investors for seven years from the date of first repayment of interest. According to him, the company was allowed to utilize the subsidy only for repayment of term loans taken by it for expansion of existing business and the intention of granting subsidy thereof is to assist the company to recoup part of above investment and to repay the borrowings. Ld. counsel for the assessee narrated that the loan account under the Industrial Promotion Scheme was for the setting up of captive power plant and this fact has been admitted by lower authorities. This loan from State Bank of India and State Bank of Bikaner & Jaipur for a sum of Rs. 40.50 cr. was taken for the purpose of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... good as are duly recognized by the Government by an order in this respect as a qualifying sphere of activity. (j) "Loan/borrowing" means any long term loan or advance where the terms under which money is loaned or advanced provide for repayment along with interest thereon. Such loan/borrowing should e meant for creation of fixed assets and shall not include working capital loan, overdraft, and current liabilities. Lon/borrowing shall be obtained from scheduled commercial bank and/or financial institutions of the State or Central Governments. Further, the terms and conditions in respect to interest subsidy and / or wage /employment subsidy is described as under:- "The Interest Subsidy and/or Wage/Employment Subsidy sanctioned and paid under the Scheme and the exemption of luxury tax, electricity duty, mandi tax, entertainment tax, stamp duty, conversion charges and other benefits availed under the Scheme shall be subject to the following conditions. Breach of any of these conditions shall make the subsidy/exemption amount liable to be recovered as Tax or arrears of land revenue/along with interest @ 18% per annum from the date from which the subsidy was provided." We have also go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing unit. From the scheme and fact it is clear that the assessee has put its manufacturing unit under expansion from the loan taken under scheme. The assessee claimed that in its case the purpose of giving subsidy was to ensure that the assessee made investment in expansion / modernization. As the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken for setting up new units/expansion of existing business, granting of the subsidy therefore was to assist the assesseecompany to recoup part of the above investment and to repay the borrowing. Consequently and considering the capitalistic intention of the grant, we have already held the subsidy in the form of sales tax as capital in nature. Even, it would be evident from the 2003 Scheme that the same was framed with a view to provide investors as attractive opportunity to invest in the State of Rajasthan. The salient features of the 2003 Scheme may be summarized as under:- (a) The 2003 Scheme was applicable to all new investments and investment made by existing units and enterprises for modernization / expansion / diversification subject to the condition that such units shall commence commercial produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the overdue amounts were cleared and regular repayment was started. The scheme ensured timely repayment of the loans with interest taken for creating fixed assets for the purpose of expansion. In the similar circumstances Hon'ble Supreme Court in the case of CIT v Ponni Sugars and Chemicals Limited (2008) 306 ITR 392 (SC) has laid principle on the very same issue and Tribunal in assessee's own case for assessment years 2001-02 to 2005-06 held that the subsidy received by the assessee was a capital receipt. 25. As we have held this subsidy receipt on account of interest on loan for expansion of manufacturing unit of the assessee-company, we are of the view, even admitted by assessee, that in the event the contention of the assessee for treatment of the subsidy as a capital receipt is accepted, in view of the provisions of Explanation 10 to section 43(1) of the Act, the Assessing Officer may be directed to reduce the amount of subsidy in determining the actual cost of the fixed assets for depreciation allowance. We direct the AO to reduce the amount of subsidy in determining the actual cost of the fixed assets for depreciation allowance. This issue of assessee's appeal is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without appreciating the facts and submissions made by the appellant company in earning the said income." Revenue has raised following ground No.4:- "4.That Ld. CIT(A)-VI Kolkata has erred in law as well as on facts by deleting the addition made by the AO on account of disallowance u/s. 14A for Rs. 1,36,63,647/-" 29. We have heard rival contentions and gone through facts and circumstances. We find that the AO during assessment proceedings noted the fact that assessee earned dividend of Rs. 1,34,79,846/- claimed as exempt u/s.10(34) of the Act and dividend of Rs. 10,86,28,149/- claimed as exempt u/s. 10(35) of the Act. He found that in respect of these exempt incomes the assessee did not make any disallowance u/s14A. The AO relied on the decision of Special Bench of ITAT Mumbai n the case of M/s Daga Capital and applied the formula given in Rule 8D(iii) and calculated disallowance u/s.14A as Rs. 1,48,84,723/- and added to the total income of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who restricted the disallowance at 1% of the exempt income. Aggrieved, both came in second appeal before tribunal. 30. We find that the AO has applied Rule 8D(iii) read with s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned CIT(Appeals) further erred in not directing the AO to exclude it from the total income." 32. At the outset, Ld. counsel for the assessee took us to the order of CIT(A) and argued that the CIT(A) has not admitted this ground and requested that the issue can be remitted back to the file of CIT(A) by directing him to adjudicate this ground. We have seen from the order of CIT(A) that the same was raised before CIT(A) by way of additional ground but he has not adjudicated for the reason that the assessee has not filed revised return for making the claim but he has made claim by way of computation of income. After hearing both the sides, we are of the view that this issue requires adjudication because the facts are already available in the assessment records. Similar issue was referred back by this Tribunal in assessee's own case for AY 2006-07 in ITA No. 1812/K/2010 dated 29.07.2011 vide para 9.4, wherein the Tribunal exactly on similar facts and same issue has been remitted back to AO for fresh adjudication. In term of the decision in AY 2006-07 of this Tribunal, we remit the issue back to the file of the AO to decide afresh after giving reasonable opportunity of being hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed the same. This issue of revenue's appeal is dismissed. 35. The next issue of revenue's appeal is against the order of CIT(A) deleting the addition made by the AO on account of profit on sale of fixed assets. For this, revenue has raised following ground no.3: "3. That Ld. CIT(A)-VI, Kolkata has erred in law as well as on facts by deleting the addition made by the AO on account of profit on sale of fixed assets for Rs. 45,34,000/-." 36. We have heard rival submissions and gone through facts and circumstances of the case. We find that this issue has been decided by the tribunal in assessee's own case in ITA No.1936/K/2010 for AY 2006-07 dated 29.07.2001 against the revenue and in favour of assessee. The Tribunal vide para 23 of its order has held as under: "23. We have heard the parties and perused the material placed on record. Section 43(6)(c)(i)(B) specifically requires the reduction of the written down value of the block of assets by the moneys payable in respect of any asset falling within that block which is sold during the previous year. We find that the ld. CIT(A) discussed the facts and legal position in this regard by observing as under:- 'I have gone through ..... X X X X Extracts X X X X X X X X Extracts X X X X
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