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TMI Blog2017 (11) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... pple 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of ₹ 2.5 crore as capital in nature, being, the amount subsidy from West Bengal Government under West Bengal Incentive Scheme, 2000. It was submitted that same was Capital Investment subsidy given to incentivize the setting up of units in West Bengal and, hence, not a revenue receipt. The Assessing Officer treated the same as revenue. The ld. CIT(A) overturned the assessment order on this point. 4. Having heard both the sides and perused the relevant material on record, it is seen, as an admitted position, that the subsidy of ₹ 2.50 crore was given for setting up of unit in West Bengal and the same has been characterized as Capital investment subsidy . The Hon'ble Supreme Court in Sahney Steel and Press Works vs. CIT (1997) 228 ITR 253 (SC), has held that the operational subsidy which is received after commencing the business is taxable income. The Hon'ble Apex Court has further laid down in this case that the purpose of subsidy should be examined. If such subsidy is for encouraging the establishment of new units, then, it is capital, but, the operational subsidies allowed after commencing of business, are taxable in nature. The Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Building at ₹ 2.19 crore. Opening gross figures show total of assets at ₹ 14.47 crore with Building at ₹ 2.98 crore and Plant machinery at ₹ 10.99 crore. On a pointed query from the Bench, the ld. AR submitted that the Mango pulp plant started in the preceding year and that is the reason for which the Assessing Officer treated the business as commenced in his order for the assessment year 2004-05. As regards heavy additions made to Plant machinery and Building during the year, the ld. AR candidly admitted that Pineapple unit was being set up and it commenced during the year relevant to the assessment year under consideration. It is, therefore, clear that all the assets of the assessee were not put to use, after installation, throughout the year. Proviso to section 36(1)(iii) provides that: any amount of the interest paid in respect of capital borrowed for acquisition of an asset (whether capitalized in the books of account or not) for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be deducted as allowed. In view of this clear pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 2.50 crore should not have been reduced from the value of fixed assets. He relied on the judgment of the Hon'ble Supreme Court in the case of CIT vs. P.J. Chemicals (1994) 210 ITR 830 (SC) in which it has been held that the amount of subsidy received under Central Scheme should not be reduced from cost of assets for depreciation. 10. Having gone through the relevant material on record, it is found that the assessee, in fact, received capital investment subsidy of ₹ 2.50 crore which relates to the setting up of its unit in West Bengal. The moot question is whether the amount of such subsidy of ₹ 2.50 crore should be reduced from the cost of fixed assets. It is, no doubt, true that the Hon'ble Supreme Court in P.J. Chemicals (supra) has held that subsidy received from Government under Central Subsidy Scheme is an incentive and not for the specific purpose of meeting a portion of cost of assets and the same is, therefore, not deductible from actual cost for the purposes of calculation of depreciation. However, it is relevant to note that the Parliament has neutralized the effect of the judgment in P.J. Chemicals (supra) by inserting Explanation 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at on the date when the assessee had invested in fixed capital assets, Explanation 10 to sub-section (1) of section 43 of the Act was not on the statute book and hence, the actual cost came to be computed in terms of the law as existing at the relevant time. 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 (supra) , 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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