Rohit Exhaust Systems Pvt. Ltd.,, ... vs Assessee

Rohit Exhaust Systems Pvt. Ltd., K 245, MIDC, Waluj, Aurangabad. .... Appellant

PAN: AABC7135D

Vs.

The Asst. Commissioner of Income Tax, Circle - 1, Aurangabad. .... Respondent

Appellant by : Shri S.N. Puranik Respondent by : Shri Achal Sharma

Date of hearing : 09-02-2015 Date of pronouncement : 31-03-2015

ORDER

PER SUSHMA CHOWLA, JM:

This appeal filed by the assessee is against the order of CIT(A),

Aurangabad dated 13.09.2013 relating to assessment year 2008-09 passed

under section 143(3) of the Income-tax Act, 1961.

2. The assessee has raised the following grounds of appeal:

1. The Commissioner (Appeals) has erred in holding that 'Capital Incentive subsidy received for establishing industry in Backward area is to be reduced from actual cost of asset'

Appellant prays to hold that Capital Subsidy, is not to be reduced from 'Actual Cost'

2. The Commissioner (Appeals) has erred in not following jurisdictional Pune ITAT decision in case of 'Balaprasad Agarwal' referred to him.

3. Appellant prays to add, alter, amend, modify and / or withdrawn the grounds as and when necessary.

2 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

3. The brief facts of the case are that, the assessee was engaged in the

business of manufacturer of Pressparts & Fabricated Assemblies & Painting

various Pressparts and fabricated items. During the year under consideration,

the assessee had received Rs.15 lakhs Special Capital Incentive Subsidy

under the Package Scheme of Incentive, 1993 which has been claimed as

capital receipt by the assessee. Under the scheme, Government of

Maharashtra had proposed that where the industries are shifted outside

Bombay-Thane-Pune Belts, Special Capital Incentive in the form of additional

sales tax incentive, instead of cash grant was offered. The eligible SSI unit

was entitled to draw the incentive after completion of all initial and final steps

and the same was to be computed on the basis of fixed capital investment

actually made by the eligible SSI unit. The Assessing Officer was of the view

that the subsidies were capital or revenue in nature is to be decided from the

nature of subsidies. Merely because subsidies have been granted for

encouraging the setting up of industries in a particular area of the State, does

not establish that it is capital in nature. Further, under the scheme, the units

were eligible to draw the Special Capital Incentive at a certain percentage of

the fixed capital investment after the completion of all steps necessary for

setting up of unit and even before the commencement of production

established that the said subsidy is in the nature of revenue receipt. The

Assessing Officer placed reliance on various decisions of the Hon'ble

Supreme Court and Hon'ble High Courts. The second issue considered by the

Assessing Officer was the applicability of section 41(1) of the Act and it was

held that since the assessee had claimed depreciation on the assets, the

provisions of section 41(1) of the Act were applicable and the same was

added as income of the assessee. Another aspect considered by the

Assessing Officer was the Explanation 10 to section 43(1) of the Act and it

was held that the said provisions of the Act were applicable and the value of

fixed assets should be reduced by the quantum of Special Capital Incentive 3 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

received during the year. However, since the said amount was treated as

income under section 41(1) of the Act on protective basis, the provisions of

Explanation 10 to section 43(1) of the Act were held to be applicable to the

facts of the case.

4. The CIT(A) held that the Special Capital Incentive received under

Package Incentive Scheme of Government of Maharashtra for establishing

industry in backward area of Aurangabad, as revenue receipt, could not be

accepted, in view of the decision of Hon'ble Bombay High Court in CIT Vs.

Reliance Industries Ltd. (2011) 339 ITR 632 (Bom). The first contention of the

Assessing Officer was thus rejected by the CIT(A). The second contention of

the Assessing Officer that the said investment was to be added as income

under section 41(1) of the Act, as depreciation was an item of expenditure

claimed by the assessee, in respect of assets on which subsidy had been

received, was also rejected by the CIT(A), in view of the ratio laid down by

Hon'ble Supreme Court in Nector Beverages (P) Ltd. Vs. DCIT 314 ITR 314

(SC). However, the third contention of the Assessing Officer that Explanation

10 to section 43(1) of the Act was applicable and the capital incentive received

had to be reduced from the cost of the assets, was applied, in view of the

Explanation 10 inserted to section 43(1) of the Act w.e.f. assessment year

1999-2000. Reliance in this regard was placed on the following decisions:-

i) Alfa Laval India Ltd. Vs. DCIT (2008) 117 TTJ 902 (Pune)

ii) CIT Vs. Janak Steel Tubes (P) Ltd., 179 ITR 536 (P&H)

iii) CIT Vs. Jinal Bros. Rice Mills, 179 ITR 470 (P&H)

5. The Assessing Officer was therefore, directed to reduce the cost of

assets in respect of which the subsidy had been received and allow the

depreciation on the reduced cost of assets.

6. The assessee is in appeal against the order of CIT(A).

4 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

7. The learned Authorized Representative for the assessee pointed out

that the Special Capital Incentive received as per the Maharashtra Package

Incentive Scheme was establishing units in backward areas of State and not

for acquiring capital assets and only mode of computation of subsidy was

certain percentage of investment in capital assets subject to ceiling limit. The

plea of the learned Authorized Representative for the assessee was that the

subsidy was by way of capital contribution for establishing industry in

backward area and was a capital receipt which would not reduce the cost or

WDV of the asset for the purpose of depreciation. Reliance in this regard was

placed on the ratios laid down by Kolkata Bench of the Tribunal in DCIT Vs.

Rasoi Ltd. (2014) 46 taxmann.com 214 (Kolkata - Trib) and by

Visakhapatnam Bench of the Tribunal in Sasisri Extractions Ltd. Vs. ACIT

(2008) 119 TTJ (Visakha) 976. It was further pointed out by the learned

Authorized Representative for the assessee that the reliances placed upon by

the CIT(A) were mis-placed as the decision in Alfa Laval India Ltd. Vs. DCIT

(supra) was in relation to subsidy received from National Dairy Development

Board and not from Government of Maharashtra. Further, the decisions in CIT

Vs. Janak Steel Tubes (P) Ltd. (supra) and in CIT Vs. Jinal Bros. Rice Mills

(supra) were in relation to the scheme prior to insertion of Explanation 10 to

section 43(1) of the Act and both the schemes were different. Our attention

was drawn to the purpose of scheme and also the scope of scheme and

method of giving subsidy, which was not to be adjusted against the cost of

assets.

8. The learned Departmental Representative for the Revenue pointed out

that after the insertion of Explanation 10 to section 43(1) of the Act, the capital

incentive subsidy received is to be reduced from the cost of assets. Further,

reliance was placed on the order of CIT(A), in this regard. 5 ITA No.1880/PN/2013

Rohit Exhaust Systems Pvt. Ltd

9. We have heard the rival contentions and perused the record. The

assessee during the year under consideration had received Capital Incentive

Subsidy under the Package Incentive Scheme, 1993 of Government of

Maharashtra for establishing industries in the backward area of Aurangabad.

The assessee had claimed the said receipt to be capital in nature as the object

of the subsidy was to set up units in backward areas. The said plea of the

assessee has been accepted by the CIT(A), in turn, relying on the ratio laid

down by Hon'ble Bombay High Court in CIT Vs. Reliance Industries Ltd.

(supra), against which the Revenue is not in appeal, hence, the said

proposition is accepted in the hands of the assessee. The second proposition

raised by the Assessing Officer that the said subsidy is to be added as income

under section 41(1) of the Act, in view of the ratio laid down by Hon'ble

Bombay High Court in Nector Beverages (P) Ltd. Vs. DCIT (2004) 267 ITR

385 (Bom) has been reversed by the CIT(A) since the Hon'ble Supreme Court

has reversed the decision of Hon'ble Bombay High Court in Nector Beverages

(P) Ltd. Vs. DCIT (supra). The Revenue is also not in appeal against the said

proposition and the same stands accepted. The third proposition proposed by

the Assessing Officer was that in the alternate Explanation 10 to section 43(1)

of the Act is applicable and the value of capital incentive is to be reduced from

the cost of assets in respect of which the said subsidy had been received and

the CIT(A) has applied the same.

10. The perusal of the Package Scheme of Incentive, 1993 placed at pages

21 to 44 reflect that the purpose of the scheme was to establish industries in

the underdeveloped areas of the Maharashtra State under which the

Government appointed SICOM Ltd. to act as an agent of the Government for

the implementation of the scheme. Under the 1993 scheme, the procedures

were framed and the entrepreneur was entitled to special capital incentive of 6 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

varying percentage of the gross fixed capital investment, subject to ceiling in

respect of eligible unit, provided where the entrepreneur does not opt for

availing sales tax incentive under Part-III of 1993 scheme. Under the said

scheme a grant of Rs.15 lakhs was disbursed to the assessee.

11. We find that similar issue of taxability of the capital incentive received

under the Package Scheme Incentive, 1993 arose before the Tribunal in ACIT

Vs. M/s. Endress + Hauser Flowtec (India) Pvt. Ltd., in ITA No.1206/PN/2011,

M/s. Endress + Hauser Flowtec (India) Pvt. Ltd., Vs. ACIT in ITA

No.1215/PN/2011 and Cross Objection, relating to assessment year 2007-08

and M/s. Endress + Hauser Flowtec (India) Pvt. Ltd., Vs. ACIT in ITA

No.295/PN/2013, relating to assessment year 2008-09, order dated

25.02.2015 and in lead order i.e. ITA No.1206/PN/2011, the Tribunal

considered the ratio laid down by the Mumbai Bench of the Tribunal in the

case of Everest Industries Ltd. Vs. ACIT vide ITA No.814/Mum/2007 relating

to assessment year 2003-04 order dated 04.12.2009, wherein it was held as

under:-

"10.4 Coming to the merits of the case, the "G" bench of the Tribunal in the case of M/s Zenith Fibres Ltd (supra) had considered the incentive scheme of the Maharashtra Government of 1993 and came to a conclusion that this scheme is identical to the incentive scheme of 1979 considered by the Special Bench of the tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB) and concluded that the receipt in question is capital receipt."

12. The Tribunal after considering the Scheme of 1993 observed as under:-

"33. The contention of the learned Authorised Representative for the assessee was that 1993 scheme formulated by the Government of Maharashtra has been considered by the Mumbai Bench of the Tribunal in Everest Industries Vs. ACIT (Supra), wherein it has been held that the incentive received under the scheme was capital receipt. It has also been held by the Mumbai Bench of the Tribunal that the scheme referred to in the case of Reliance Industries Ltd., i.e. 1979 scheme was identical to the 1993 scheme. The Hon'ble Bombay High Court in the case of CIT Vs. Reliance Industries Ltd., (Supra) in the appeal filed by Revenue against the order of Special Bench of Mumbai Tribunal reported in (2004) 88 ITD 273 (SB) (Mum) have held that the subsidy received under the 1979 scheme for setting up new units in backward areas was a capital receipt. Applying the same ratio to the facts of the 7 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

present case, we are in conformity with the order of the CIT(A) in holding that the grant of Rs.30 lakhs received by the assessee during the year under consideration was a capital receipt and not taxable in the hands of the assessee. Further, there is no merit in invoking of the provisions of either section 41(1) or section 43(1)(b) of the Act. Thus, ground of appeal No.3 raised by the Revenue is dismissed."

13. The issue before us is restricted to the invoking of Explanation 10 to

section 43(1) of the Act, under which it is provided that where portion of cost of

asset acquired by the assessee has been met directly or indirectly by the

Central Government or the State Government or any Authority established

under any law or by any other person, in the form of subsidy or grant or

reimbursement, 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 cannot be directly relatable to the asset

acquired, so much of the amount which 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 other

words, in order to invoke the provisions of Explanation 10 to section 43(1) of

the Act, it is necessary to establish that the subsidy was directly or indirectly

utilized for meeting the cost or portion of cost of asset acquired. Where it is

found that the cost for acquiring the asset was directly or indirectly met out of

the subsidy, then the value of subsidy is to be reduced from the cost of the

asset to re-work the depreciation on the said asset. Under the proviso, it is

also provided that it is necessary to show that the subsidy had been directly or

indirectly used for the acquisition of an asset. The facts of each case in this

regard have to be seen to determine whether the subsidy has been granted to

meet the cost of asset directly or indirectly. Similar proposition has been laid

down by the Kolkata Bench of the Tribunal in DCIT Vs. Rasoi Ltd. (supra) and

also by Visakhapatnam Bench of the Tribunal in Sasisri Extractions Ltd. Vs.

ACIT (supra). It has been further laid down by the Tribunal in Sasisri 8 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

Extractions Ltd. Vs. ACIT (supra) that even after insertion of Explanation 10 to

section 43(1) of the Act, the basic principle underlying the decision of Apex

Court in CIT Vs. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) still holds the

field. The Tribunal has held as under:-

"10. We have carefully considered the rival submissions and perused the record. In our considered opinion, even after insertion of Expln. 10 to s. 43(1) of the Act, the basic principle underlying in the decision of the apex Court in the case of PJ. Chemicals Ltd. (supra) still holds the field. Their Lordships analysed the expression "met directly or indirectly" to come to the conclusion that only in a case where a subsidy or other grant was given to offset the cost of an asset, such payment/grant would fall within the expression 'met', whereas the subsidy received merely to accelerate the industrial development of the State cannot be considered as payments made specifically to meet a portion of the cost of the assets.

11. A careful perusal of 'Target 2000' scheme shows that the scheme was intended to accelerate industrial development of the State and the incentive was given for setting up of industries in Andhra Pradesh and for the purpose of determining the amount of subsidy to be given, cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital. Under the circumstances, we are of the view that the incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it falls outside the ken of Expln. 10 to s. 43(1) of the Act. In the light of the above discussion, we are of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the cost of the capital asset. The AO is directed accordingly."

14. The perusal of the Package Scheme of Incentive, 1993 reflect that the

scheme was formulated to give incentive for setting up the industries in certain

belts of Maharashtra and for the purpose of working out the amount of

subsidy, though the cost of eligible investment was taken as the base, but the

said subsidy was not specifically intended to meet the cost of assets. In view

thereof, it could not be held that the incentive received by the assessee under

the Package Scheme of 1993 in the form of subsidy was covered under

provisions of Explanation 10 to section 43(1) of the Act and consequently, the

subsidy amount was not to be reduced from the cost of the assets.

Accordingly, the Assessing Officer is directed not to reduce the value of the 9 ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd

subsidy from the cost of assets while allowing depreciation on the said assets

of the assessee.

15. In the result, the appeal of the assessee is allowed.

Order pronounced on this 31st day of March, 2015.

Sd/- Sd/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 31 st March, 2015.

GCVSR

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A), Aurangabad; 4) The CIT, Aurangabad; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File.

By Order //True Copy//

Assistant Registrar I.T.A.T., Pune