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TMI Blog2022 (4) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... Year and Date of Assessment order Order of Commissioner of Income Tax (Appeals) Order of Income Tax Appellate Tribunal ITA No. 1 2008-2009; dtd 15.12.2010 Appeal No. ITA 97/R-1/E/CIT(A)II/2010-11; dtd 30.03.2014 I.TA. No. 354/Coch/2014; dtd 19.04.2018 I.T.A No.62/2018 2 2009-2010; dtd 17.11.2011 Appeal No. ITA 82/R-1/E/CIT(A)II/2011-12; dtd 30.03.2014 ITA No. 338/Coch/2014; dtd 19.04.2018 I.T.A No.65/2018 4. The common circumstances in both the appeals are stated thus: The assessee, a wholly-owned subsidiary company of Kinfra (a statutory body constituted by the Government of Kerala) has established and operated an industrial park at Kakkanad, Kochi. The Government of India for the augmentation of infrastructure/facilities in Export Promotion Industrial Parks provided assistance to states under a scheme known as 'Assistance to States for Developing Export Infrastructure and other Allied Activities' (for short, 'ASIDE'). The Government of India under ASIDE, sanctioned and transferred financial assistance through the State Government to the assessee for developing infrastructure at Industrial Park, Kakkanad, Kochi. The assessee claims that the funds given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65,118/- 4.2 The Assessing Officer, for the assessment year 2009-10 reduced the subsidy amounting to Rs. 13,75,00,885/- received between 1996 and 2000 from the gross value of capital assets of the assessee amounting to Rs. 15,44,93,432/-. Thus the Gross Value after reducing subsidy contribution has been arrived at Rs. 1,69,92,547/- and depreciation of Rs. 12,65,118 has been allowed and the depreciation claimed by the assessee was rejected. Substantially, the dispute between the assessee and the Revenue centres around Section 43(1) r/w Explanation and proviso of the Act. Appeals filed by the assessee for the above assessment years before the Commissioner of Income Tax (for short, 'the CIT(A)') and the Income Tax Appellate Tribunal (for short, 'the Tribunal') were dismissed. Hence the appeals. 5. A common substantial question is raised in both the appeals as follows: "Whether by virtue of Explanation-10 and/or proviso to Explanation 10 to Section 43(1) introduced with effect from 1.4.1999, a subsidy or grant received before the reference to specific assets is to the apportion and reduced from the cost of assets for the purpose of completing depreciation?." The following substant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case, Appellate Tribunal was right in confirming that the grant of Rs. 10,00,00,000/ received by the Appellant from the Government of India under the Scheme "Centrally Sponsored Schemes for Export Promotion Industrial Park (EMP) during the Financial Years 1996 to 2000 is to be reduced from the value of cost of assets in Assessment Year 2009-10?" 6. Senior Adv. Joseph Markose lays emphasis on the circumstances surrounding the assistance under ASIDE Scheme to bring home the nature of grant as general, received by the Assessee from State and Central Governments. One of the objectives of the financial assistance under ASIDE is to establish infrastructure/facilities in industrial estates exclusively meant for catering to the needs of export-oriented industries. One of the ways to boost foreign trade was to put in place developed infrastructure so that individual units are established and operated. Therefore, under this scheme, the discretion is given to the operator of a facility to use the financial assistance received in one or the other ways spelt out in the scheme; in the industrial park, thereby companies are attracted to establish industries and operate them. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in P J Chemicals case. The memorandum in Finance (No.2) Bill, 1998 concerning Explanation 10 reads thus: "The proposed Explanation 10 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 State Government or any Authority established under any Law or by any other person, in the form of subsidy or grant or reimbursement, then in a case where the subsidy is directly relatable to the asset, such subsidy shall not be included in the actual cost of the asset. In a case where such subsidy or grant or reimbursement is of such a nature that it cannot be directly relatable to any particular asset, the amount so received shall be apportioned in a manner that such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received and such subsidy shall not be included in the actual cost of the asset. These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years." 8.2 The expressions employed in Section 43(1) and Explanation 10 are substantially same, viz. "wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an independent section in the structure of Section 43(1) of the Act and ought not to be relied on for independently for determining the actual cost of asset. 8.4 In Union of India v. VKC Footsteps (India) (P) Ltd (2022) 2 SCC 603, the Supreme Court has explained the different ways, a proviso is applied and laid down that a proviso is construed in relation to the subject matter of the statutory provision to which it is appended. The argument made with considerable force is that in the case on hand, the proviso cannot be considered as an independent provision to the general subsidy given without relation to the acquisition of an asset. According to the Senior Advocate, the proviso to Explanation 10 is attracted in cases where the subsidy is not directly relatable to a particular asset, but the incentive is given for many assets. Post PJ Chemicals case and the amendment to Section 43(1) Explanation 10 and proviso, the Bombay High Court in CIT vs. Welspun Steel Ltd. (MANU/MH/1197/2019) held that incentives in the nature of subsidies by way of waiver of Excise Duty and Sales Tax are capital in nature and such subsidies since are not given in relation to acquisition of plant and machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16992547 9.1. The incentive received prior to 01.04.1999 is adjusted in the financial year 2008-09. The view taken by this Court in CIT vs Sun Fiber Optics (MANU/KE/2157/2011) and Gujarat High Court in Banco Products vs DCIT (2015) 379 ITR 1) laid down that Explanation 10 introduced with effect from 01.04.1999 applies prospectively. Therefore, any assistance received as subsidy/grant prior to 01.04.1999 cannot be adjusted in the assessment year 2009-10 for arriving at the actual cost of the asset and the depreciation is calculated on such reduced written down value or the asset. At any rate, the subsidy of Rs. 8,49,00,000/- received before 01.04.1999 cannot be adjusted in the assessment year 2009-10. He argues that, reliance on Saharanpur Electric Supply vs CIT (1992 194 ITR 296) to contend that the Assessing Officer has jurisdiction to redetermine the actual cost of an asset is not applicable to the circumstances of the case. The assessee is denied of benefit of ratio of PJ Chemicals. Without prejudice to the above argument, it is further contended that the amendment introduced with effect from 01.04.1952 to the Income Tax Act, 1952 by the introduction of Explanation to the defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive value or meaning of Explanation 10 r/w proviso to Section 43(1) of the Act. Finance (No.2) Bill, 1998 sets out the reasons warranting incorporation of an Explanation to Section 43(1) and by way of a proviso, a different and distinct situation is taken care of. The assessment years covered in these two appeals are post amendment to inserting Explanation 10 and proviso to Section 43(1). The expression as its stands for the applicable assessment years must be given effect to by the authorities as well as the court. It is not a requirement in law that amendment shall state that Section 43(1), is amended to erase the effect of the ratio laid down by the Supreme Court in P.J Chemicals case. The parliament, in its wisdom, sets out the factors excluded in the computation of the actual cost of an asset in the hands of the assessee. The argument of the assessee that the expression in Section 43(1) and the first limb of Explanation 10 are one and the same, and therefore even now, the dictum of PJ Chemicals is applicable is untenable. According to the Standing Counsel, the Explanation is not a verbatim reproduction of Section 43(1). A perusal of Explanation 10 does not allow the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or in reimbursement is so received, shall not be included in the actual cost of the asset to the assessee." 13. The controversy between the Revenue and the assessee is that for the purpose of determining the actual cost of assets on which depreciation has to be allowed under Section 32 of the Act, the amount of subsidy received by the assessee should be reduced from the actual cost of the assets and the depreciation allowable only on the actual cost so reduced. The Revenue contends that the depreciation is allowable on actual cost, financial assistance/ incentives/subsidy received by the assessee could be adjusted, and the actual cost of asset reduced to that extent. The issue, in a wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt examining does not partake the incidence, which attracts the conditions for the deductibility from the actual cost. The Government subsidy is not unreasonable to say it is an incentive not for the specific purpose of meeting a portion of the cost of the assets though quantified as or get to a percentage of that cost. If that be so, it does not partake of the character of the payment intended either directly or indirectly to meet the actual cost. 14. The Parliament by the Finance (No.2) Act, 1998 introduced Explanation 10 r/w proviso to Section 43 of the Act. 14.1 The Revenue argues that a line has to be drawn for the application of the dictum in P J Chemicals between pre and post 1.4.1999. In cases where the subsidy is received, Explanation 10 deals with a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by a third party and the grant is in the form of a subsidy in such a situation so much of the cost as is relatable to such subsidy shall not be included in the actual cost to the assessee. In terms of the proviso, the subsidy if cannot be directly relatable to any asset acquired by the assessee, then so much of the amount which bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SOR for the proposed amendment. The reason that PJ Chemicals is not referred to in the Memorandum, in our considered view is not making a material difference to Explanation 10 and the proviso of Section 43(1) unless this Court notices ambiguity in the text of Explanation 10 r/w proviso. This Court is under obligation to appreciate the Explanation and the proviso and would decide its meaning and scope. 15.3 An explanation at times is appended to a section to explain the meaning of words, contained in the section. It becomes a part and parcel of the enactment. The meaning to be given to an explanation must depend upon its terms, and no theory of its purpose can be entertained unless it is to be inferred from the language used. (Krishna Ayyanakr v. Nattaperumal Pillai (ILR 43 madras 550, Dattatraya Govind Mahajan v. State of Maharashtra (1977 2 SCC 548), and Aphali Pharmaceuticals Ltd v. State of Maharashtra (1989 4 SCC 378).). Purposive construction is permissible if any other construction which does not fit in with the description or the avowed purpose. We may sum up the objects of an explanation by referring to Sundaram Pillai v. Pattabiraman (1985 1 SCC 591: "(a) to explain th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. The proviso may, as Lord Macnaghten laid down, be a qualification of the preceding enactment which is expressed in terms too general to be quite accurate (AC p. 62). The general rule has been stated by Hidayatullah, 1.2, in the following words: (AIR p. 1600, para 9) 9. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general rule. And in the words of Kapur. J.2 (AIR p. 717, para 9) *9. ...The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment...."(emphasis supplied) 92. But then these principles are subject to other principles of statutory interpretation which may supplement or even substitute the above formula. These other rules which have been categorised by Justice G.P. Singh are summar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute may have intended for the proviso to be, in substance, a fresh enactment: "... To read a proviso as providing something by way of an addendum or as dealing with a subject not covered by the main enactment or as stating a general rule as distinguished from an exception or qualification is ordinarily foreign to the proper function of a proviso. However, this is only true of a real proviso. The insertion of a proviso by the draftsman has not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before." 93. Perhaps the most comprehensive and oft-cited precedent governing the interpretation of a proviso is the decision of this Court in S. Sundaram Pillai v. V.R. Pattabiraman, S. Murtaza Fazal Ali, J. speaking for a three-Judge Bench of this Court held: (SCC p. 610, para 43) '43. .............To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of an asset acquired by the assessee has been met directly or indirectly by the Central/State Government Authority or any other person and such receipt is in the form of a subsidy or grant or reimbursement (by whatever name called) in such situation, 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. Applying the above construction to circumstances in the case on hand, without much deliberation, this Court concludes that the financial assistance received by the Assessee from the Government under the ASIDE scheme is not asset-specific. Therefore, Explanation 10 per se is not attracted to the case of the assessee. The said conclusion does not resolve the controversy on hand. For a definite view ought to be recorded after reading all the provisions applicable to the principle of determining the actual cost of the asset. 16.1 In VKC Footsteps case, in para 92.3, 92.4, laid down the use of a proviso may shed light on the true meaning of the section; as a matter of abundant caution; acquires the tenor and color of the substantive enactment. we are hence not agreeing with the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for the purpose of computing the depreciation. For the above reasons, the common question in both the appeals is answered in favour of Revenue and against the assessee. The substantial question No.2 in ITA No. 62/2018 18. Assessee contends that the apportionment of the subsidy to building, furniture, plant & machinery, computer software etc. is illegal and contrary to the definition of the actual cost under Section 43(1) of the act r/w Explanation 10 r/w proviso. The assessee has discretion under ASIDE to utilise the grant on need-based development. So as evidenced by the utilisation certificate dated 03.01.2011, the assessee utilised the financial assistance for capacity enhancement of the water and power distribution facilities in the Industrial Park. The Assessing Officer for the assessment year 200809 apportioned the subsidy of Rs. 3,75,88,500/- against all the assets of the assessee. The proviso, even if is applicable under the scheme, the assessee has the discretion to spend the amount either acquire an asset or enhance the capacity of an asset. When it comes to the determination of actual cost, the adjustment shall be made only in respect to the asset against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as indicated above. Question Nos. 4 and 5 in ITA No.65 of 2018. 21. The substantial question deals with two entries; one for the financial year 2006-07 amounting to Rs. 3,75,00,885/- and Rs. 10,00,00,000/- received by the assessee during the financial years 1996-2000 can be reduced from the value of the cost of assets in the assessment year 2009-10. The financial assistance received during the financial years 1996-2000, is stated thus: Date Amount (Rs.) 01.03.1996 3,00,00,000 29.03.1996 2,89,00,000 24.04.1998 2,00,00,000 31.03.1999 60,00,000 31.03.2000 1,51,00,000 Total 10,00,00,000 22. Mr Joseph Markose argues that on 14.09.1994, PJ Chemicals was decided by the Supreme Court. In all fours, the dictum laid down by the Supreme Court in PJ Chemicals case is applicable to the case of the assessee upto 31.03.1999. Explanation 10 and proviso to Section 43, do not have retrospective operation. Therefore, financial assistance received till 31.03.1999 cannot be adjusted in the actual cost of any of the assets of the assessee for the financial years during which the assistance was received, because the financial assistance was not for acquiring any specific asset. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export-oriented industries are set up to replenish the infrastructure from the financial assistance given to the assessee. This being the undisputed fact, treating the entire financial assistance received in the slab years as falling under the proviso introduced with effect from 01.04.1999 is illegal and unsustainable. It is not the case of Revenue before us that the amendment is retrospective. The justification offered for reworking the actual cost of assets is on the ratio decided in Saharanpur Electric Supply case. We have already held that the said judgment is distinguishable. No material is placed indicating that the amendment inserted through the Finance (No.2) Bill, 1998 has retrospective operation or nullified the dictum of PJ Chemicals. We are in complete agreement with the view expressed both by this Court and the Gujarat High Court, on the amendment to Section 43(1), Explanation 10 and the proviso as prospective. The adjustment of Rs. 13,75,00,885/- as noted in the assessment order is illegal, and even for the view, we have taken while answering the main question, unsustainable. 25. Having regard to the above discussion, we are of the view that the computation of depre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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