IT: For computation of depreciation, no part of Government subsidy for

encouragement for setting up of industrial projects could be deducted from

actual cost/WDV of fixed assets, if same is not relatable to acquisition of assets

[2014] 46 taxmann.com 214 (Kolkata - Trib.)

IN THE ITAT KOLKATA BENCH 'B'
Deputy Commissioner of Income-tax, Circle-4, Kolkata
v.
Rasoi Ltd.*
MAHAVIR SINGH, JUDICIAL MEMBER
AND SHAMIM YAHYA, ACCOUNTANT MEMBER
IT APPEAL NO. 1398 (KOL.) OF 2011
[ASSESSMENT YEAR 2007-08]
APRIL 2, 2014

I. Section 43(1), read with section 32 of the Income-tax Act, 1961 - Actual cost (Subsidy)
- Assessment year 2007-08 - Whether in order to invoke Explanation 10, it is necessary
to show that subsidy was directly or indirectly used for acquiring an asset - Held, yes -
Whether relatable subsidy to an asset can be reduced from its cost only if it is found
that cost of acquiring that asset was directly or indirectly met out of subsidy - Held, yes
- Whether likewise in proviso to Explanation 10, it is necessary to show that subsidy
has been directly or indirectly used to acquire an asset but it is not possible to exactly
quantify amount directly or indirectly used for acquiring asset - Held, yes - Assessee
company received subsidy from Government of West Bengal as encouragement for
setting up of industrial projects - Maximum limit of subsidy was restricted with
reference to value of fixed asset but no part of subsidy was intended to subsidize cost
of any fixed asset - Whether amount of subsidy could not be deducted from actual cost,
as same was not relatable to acquire asset directly or indirectly and, resultantly,
allowable depreciation could not be reduced - Held, yes [Paras 7 and 8] [In favour of
assessee]
II. Section 14A, read with sections 10(34) and 10(38), of the Income-tax Act, 1961 and
rule 8D of the Income-Tax Rules, 1962 - Expenditure incurred in relation to income not
includible in total income (Rule 8D) - Assessment year 2007-08 - Assessee derived
dividend income at Rs. 27.16 lakh and long-term capital gain at Rs. 81.03 lakh and
claimed same as exemption under section 10(34) and 10(38) - Assessing Officer invoked
rule 8D and made disallowance of Rs. 11.31 lakh - On appeal, Commissioner (Appeals)
restricted disallowance at 1 per cent of exempted income - It was found that Bombay
High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194
Taxman 203, held that rule as inserted by the Income-tax (Fifth Amendment) Rules, 2008
w.e.f. 24-3-2008 is prospective and not retrospective - Whether following this judgment,
there was no infirmity in order of Commissioner (Appeals) - Held, yes [Para 11] [In
favour of assessee]
FACTS-I
 During the year under consideration assessee-company received Rs. 4.50 crore
incentive subsidy from Government of West Bengal under West Bengal Incentive
Scheme, 1999 as encouragement for setting up of industrial projects in the State. The
maximum limit of the subsidy was restricted with reference to the value of fixed
capital investments in land, building, plant and machinery but no part of the subsidy
was specifically intended to subsidize the cost of any fixed asset and, therefore,
cannot be considered as payment made to meet a portion of the cost of asset.
Accordingly, the assessee claimed the amount of subsidy and same was not reduced
from the actual cost/WDV of fixed assets for the purpose of computing depreciation.
The assessee claimed that during the year under consideration there was no addition
to fixed assets if netted against deduction.
The Assessing Officer allocated the amount of subsidy received during the year to
various fixed assets and reduced allocated amount from the written down value
(WDV) of those brought forward from last year and thereby reduced the depreciation
claimed to the extent of Rs. 60.68 lakh on ground that cost of asset equivalent to the
amount of subsidy received during the year have been reimbursed by the State of
West Bengal against cost of assets through the incentive scheme and that no portion
of cost of any asset acquired by the assessee has been made directly or indirectly by
the said incentive scheme.
On appeal, Commissioner (Appeals) held that since no reduction of subsidy from cost
of assets was done in earlier years and further that the impugned subsidy was given
as an encouragement for setting up industries for industrial resurgence of the State,
reducing the subsidy from the cost of asset was not justified. Accordingly, he allowed
the claim of depreciation of assessee.
On appeal:
HELD-I

The assessee has rightly not reduced the amount of subsidy received from the actual
cost/WDV of the fixed assets while claiming depreciation. It is also a fact that revenue
during scrutiny assessments of the assessee for assessment years 2003-04 and 2004-
05, the above stated subsidy was considered as capital receipt accepting the
contention of the assessee. For the sake of consistency also the Assessing Officer
should not have changed the stand now. Even Supreme Court in the case of CIT v. P.J.
Chemicals Ltd. [1994] 210 ITR 830/76 Taxman 611 has considered this issue and held
that where Government subsidy is intended as an incentive to encourage
entrepreneurs to move to backward areas and establish industries, the specified
percentage of the fixed capital cost, which is the basis for determining the subsidy,
being only a measure adopted under the scheme to quantity the financial aid, is not a
payment, directly or indirectly, to meet any portion of the actual cost. Therefore, the
said amount of subsidy cannot be deducted from the actual cost under section 43(1)
for the purpose allowing depreciation. It is further held that if Government subsidy is
an incentive not for the specific purpose of meeting a portion of the cost of the assets,
though quantified as a percentage of such cost, it does not partake the character of
payment intended either directly or indirectly to meet the 'actual cost'. By implication,
the above judgment also provides that if the subsidy is intended for meeting a portion
of the cost of the assets, then such subsidy should be deducted from the actual cost,
for the purpose of computing-depreciation. As per Supreme Court, law is that if the
 subsidy is asset-specific, such subsidy goes to reduce the actual cost. If the subsidy is
to encourage setting up of the industry, it does not go to reduce the actual cost, even
though the amount of subsidy was quantified on the basis of the percentage of the
total investment made by the assessee. [Para 6]
Explanation 10 provided under section 43(1) 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 were 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 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 asset. This is
again a question of fact. The relatable subsidy to such asset can be reduced from the
cost only if it is found that the cost for acquiring that asset was directly or indirectly
met out of the subsidy. Likewise in the proviso, it is necessary to show that the
subsidy has been directly or indirectly used to acquire an asset but it is not possible to
exactly quantify the amount directly or indirectly used for acquiring the asset. Here
also, a finding of fact is necessary that an asset was acquired by directly on indirectly
using the subsidy. The above Explanation and the proviso thereto do not dilute the
finding the Supreme Court in the case of P.J. Chemicals Ltd. (supra) that asset-wise
subsidy alone can be reduced from the actual cost. The above Explanation and the
proviso therein attempt to explain the law. They are not bringing any new law
different from the law considered by the Supreme Court in the above cases. [Para 7]
Therefore, the Commissioner (Appeals) has rightly allowed the claim of depreciation
of assessee. [Para 8]
CASES REFERRED TO

CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830/76 Taxman 611 (SC) (para 6) and Godrej & Boyce Mfg.
Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 11).
Biswanath Das for the Appellant. S.M. Surana for the Respondent.
ORDER

Mahavir Singh, Judicial Member - This appeal by revenue is arising out of order of CIT(A)-IV,
Kolkata in Appeal No. 195/CIT(A)-IV/2009-10 dated 29.06.2011. Assessment was framed by ITO,
Ward-4(1), Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for
Assessment Year 2007-08 vide his order dated 31.12.2009.
2. The first issue in this appeal of revenue is against the order of CIT(A) allowing depreciation as against
the disallowance made by AO by applying Explanation (10) to section 43(1) of the Act. For this, revenue
has raised following ground no.1:
"1. That on the facts and circumstances of the case, Ld. CIT(A) erred in law in deleting the
disallowance of Rs.60,68,025/- on account of depreciations without appreciating the fact that in the
 instant case the A.O. correctly made the said disallowance by applying Explanation-10 to section
43(1)."
3. Briefly stated facts are that during the year under consideration, the assessee company received a sum
of Rs.4,50,07,248/- as incentive subsidy from Govt. of West Bengal under West Bengal Incentive
Scheme, 1999 for setting up of Industrial Projects in the State of West Bengal. Vide this scheme the
maximum limit of the subsidy was restricted with reference to the value of fixed capital invested in land,
building and plant & machinery but no part of the subsidy was specifically intended to subside the cost
of any fixed assets and, therefore, cannot be considered as payment made to meet a portion of the cost of
the asset. Accordingly, the assessee made a claim and the amount of subsidy received was not reduced
from the actual cost/WDV of fixed assets for the purpose of computing depreciation. The assessee
claimed that during the year under consideration there was no addition to fixed assets if netted against
deduction. The AO during the course of assessment proceedings allocated the amount of subsidy
received during the year to various fixed assets and reduced allocated amount from the WDV of those
brought forward from last year and thereby reduced the depreciation claimed. The AO disallowed
depreciation to the extent of Rs.60,68,025/- on the reason that cost of asset equivalent to the amount of
subsidy received during the year have been reimbursed by the State of West Bengal against cost of assets
through the incentive scheme. According to AO, subsidy received from Govt. of West Bengal was given
as encouragement for setting up of industries in the State of West Bengal and no portion of cost of any
asset acquired by the assessee has been made directly or indirectly by the said incentive scheme.
4. Aggrieved against the disallowance of depreciation, assessee preferred appeal before CIT(A), who
allowed the claim of the assessee vide para 4.3 of his appellate order as under:
"4.3. I have carefully considered the submission made by appellant and facts narrated by A.O. in
assessment order. The facts which is not disputed for the year under consideration, the A0 had
considered the subject Govt. subsidy as capital receipt accepting the appellant's contention that the
said subsidy was given for encouraging the setting up of industries to realize the possibility of
industrial resurgence of the State of West Bengal. It is also undisputed that in the scrutiny
assessments of the appellant for asst. yr. 2003-04 and 2004-05, the said subsidy was considered as
capital receipt accepting the appellant's said contention. In those assessments, the respective subsidy
amounts were not reduced from the cost of assets for calculation of depreciation accepting the
appellant's contention that subsidy amount had not met cost of any asset directly or indirectly.
Hence, it is an accepted position of the Department that the subject subsidy was not given to meet
directly or indirectly the cost of any assets of the appellant. It was held by the Supreme Court in the
case of CIT Vs. P.J. Chemcals Ltd. (1994) 210 ITR 830 (SC) that Government subsidy, it is no
unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of
the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not
partake of the character of a payment intended either directly or indirectly to meet the 'actual cost'.
Similarly, in the case of Sasisri Extractions Ltd. Vs. ACIT (2008) 307 ITR (AT) 127
(Visakhapatnam), it was held that "We have carefully considered the rival submissions and perused
the record. In our considered opinion, even after insertion of Explanation-10 to section 43(1) of the
Act, the basic principle underlying in the decision of the apex court in the case of P.J. Chemicals
Ltd. (1994) 210 ITR 830, still hold 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
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.
 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 industrial in
Andhra Pradesh and for the purpose of determining the amount of subsidy to be given the 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 can not be considered as a payment. directly or indirectly to meet any portion of the actual
cost and thus it falls outside, the ken of Explanation 10 to section 43(1) of the Act. In the light of
the above discusson, we are of the view that for the purpose of computing depreciaton allowable
to the assessee, the subsdy amount cannot be reduced from the actual cost of the capital asset. The
Assessing officer is directed accordingly.
Respectfully following the aforesaid judgements, considering the fact that no such reduction of
subsidy from cost of assets was done in scrutiny assessment of earlier years and also considering
that there is no dispute about the proposition that the subject subsidy had been given as an
encouragement for setting up of industries for realzation of possibility of industrial resurgence of
the State, the action of the A/O in reducing the subsidy from the cost of the assets is not justified
and consequent reduction of depreciation cannot be upheld. Accordingly, this ground of appeal is
allowed. As the main ground has been allowed there is no need to adjudicate about alternative
grounds to ground no. 1."
Aggrieved, revenue is in appeal before us.
5. We have heard rival submissions and gone through facts and circumstances of the case. Before us Ld.
counsel for the assessee relied on assessee's paper book and referred to pages 1 to 50. Ld. counsel for the
assessee first of all drew our attention to copy of West Bengal Incentive Scheme 1999 (in short
"Scheme"), which is enclosed in assessee's paper book at pages 1 to 34, as notified by Notification No.
580-C1/H dated 22nd June, 1999. Ld. counsel for the assessee referred to inner page 7 of the Scheme
whereby the definition of fixed capital investment is described in clause (xxii) as under:
'(xxii) "Fixed Capital Investment" means investment made in land, building, plant and machinery
and equipment installed for pollution control measures of the approved project of the eligible unit
on or after the 1st April, 1998 subject to other conditions laid down in paragraph 6 of the 1999
Scheme.'
Ld. counsel for the assessee also drew our attention to clause (xiii) where the definition of gross value of
the fixed assets is defined as under:
'(xxiii) "Gross Value of the Fixed Assets" of the unit means the gross fixed capital investment as in
stood at the end of previous year plus the fixed capital investment made during the year minus the
value of fixed assets disposed of during the year.'
He further drew our attention to benefit given in sales tax and the relevant inner pages 17-18 of the
Scheme reads as under:
"10. SALES TAX:
10.1 Sales Tax Deferment/Remission on sale of finished goods.
10.1.1. A new Unit for its approved project shall be eligible for deferred payment of sales tax due
for payment by it or alternatively for remission of sales tax due for payment by it, for the period and
subject to ceiling as mentioned below depending on location of the unit:
Group A area Group B area Group C area
(i) Deferment of Sales Tax Nil 11 years 15 years
 due for payment by the
unit
Percentage ceiling in
terms of gross value of
........ 110% 175%
Fixed Capital Assets of
the approved project
Remission of Sales Tax
(ii) due for payment by the Nil 9 years 13 years
unit
Percentage ceiling in
terms of the gross value
....... 100% 150%"
of Fixed Capital Assets
of the approved project
Relevant clause 10.1.7 specifies about percentage ceiling and maximum limit, which reads as under:
"10.1.7. Notwithstanding the percentage ceiling specified at Clause 1, 2, 3, 4 & 5 of sub-paragraph
10.1, the maximum limit of deferment of sales tax or remission of sales tax due for payment by a
unit under the provisions contained above, is Rs.75.00 crore. Whenever the aggregate amount of
sales tax due for payment for which deferment/remission has been allowed, exceeds the percentage
ceiling of Rs.75.00 crore, whichever is less, the deferment or remission will be discontinued even
before the specified period."
The assessee has also drew our attention to the relevant excerpts from the budget statement of Finance
Minister of Govt. of West Bengal dated 19.03.1999 made at the time of presentation of budget. The
Finance Minister made specific statement as regards to resurgence of positive climate for
industrialization and the relevant extracts is as under:
"2.11 In this positive climate of industrial resurgence, we therefore desire all the common
industrialists and the common businessmen to come forward for setting up of industries,
particularly the small-scale industries in the districts. In order to encourage this participation, I shall
later propose specific incentives and facilities.
3.11 Honourable Members, I have already mentioned the specific reasons for possibility of
industrial resurgence in the State, including all the districts. In order to expedite realisation of this
possibility, the State Government has decided to introduce a new incentive scheme for industries
with effect from April 1, 1999."
The assessee has also enclosed copy of schedule of fixed assets as on 31.03.2007 and copy of letter
dated 06.03.2006 filed before the AO regarding claim of depreciation, as and when subsidy received
from West Bengal Government is claimed as capital receipt.
6. From the above facts and circumstances, admitted facts are that during the year under consideration
assessee company received incentive subsidy from Govt. of West Bengal under West Bengal Incentive
Scheme, 1999 (WBIS) as encouragement for setting up of industrial project. It is also a fact that
maximum limit of the subsidy was restricted with reference to the value of fixed capital investments in
land, building, plant and machinery but no part of the subsidy was specifically intended to subsidize the
cost of any fixed asset, therefore, it cannot be said that the subsidy was to meet a portion of cost of the
asset. According to us, the assessee has rightly not reduced the amount of subsidy received from the
actual cost/WDV of the fixed assets while claiming depreciation. It is also a fact that revenue during
scrutiny assessments of the assessee for AY 2003-04 and 2004-05, the above stated subsidy was
considered as capital receipt accepting the contention of the assessee. For the sake of consistency also
the AO should not have changed the stand now. Even Hon'ble Supreme Court in the case of CIT v. P.J.
Chemicals Ltd. [1994] 210 ITR 830/76 Taxman 611 has considered this issue and held that where
Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas
and establish industries, the specified percentage of the fixed capital cost, which is the basis for
determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is
not a payment, directly or indirectly, to meet any portion of the actual cost. Therefore, the said amount
of subsidy cannot be deducted from the actual cost under sec. 43(1) for the purpose allowing
depreciation. It is further held that if Government subsidy is an incentive not for the specific purpose of
meeting a portion of the cost of the assets, though quantified as a percentage of such cost, it does not
partake the character of payment intended either directly or indirectly to meet the "actual cost". By
implication, the above judgment also provides that if the subsidy is intended for meeting a portion of the
cost of the assets, then such subsidy should be deducted from the actual cost, for the purpose of
computing depreciation. As per Hon'ble Supreme Court, law is that if the subsidy is asset-specific, such
subsidy goes to reduce the actual cost. If the subsidy is to encourage setting up of the industry, it does
not go to reduce the actual cost, even though the amount of subsidy was quantified on the basis of the
percentage of the total investment made by the assessee.
7. The law is already settled on the subject. Now, the only wavering is with reference to Explanation 10
provided under sec.43(1). 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 asset. This is again a question of fact. The
relatable subsidy to such asset can be reduced from the cost only if it is found that the cost for acquiring
that asset was directly or indirectly met out of the subsidy. Likewise in the proviso, it is necessary to
show that the subsidy has been directly or indirectly used to acquire an asset but it is not possible to
exactly quantify the amount directly or indirectly used for acquiring the asset. Here also, a finding of
fact is necessary that an asset was acquired by directly or indirectly using the subsidy. The above
Explanation and the proviso thereto do not dilute the finding of the Hon'ble Supreme Court in the case
of P. J. Chemicals Ltd. (supra) that asset-wise subsidy alone can be reduced from the actual cost. The
above Explanation and the proviso therein attempt to explain the law. They are not bringing any new law
different from the law considered by the Hon'ble Supreme Court in the above cases.
8. In view of the above facts and circumstances of the case and legal position explained by Hon'ble
Supreme Court in the case of P. J. Chemicals Ltd. (supra), we are of the view that CIT(A) has rightly
allowed the claim of depreciation of assessee. We uphold the same. This issue of revenue's appeal is
dismissed.
9. The next issue in this appeal of revenue is as regards to order of CIT(A) restricting the disallowance
of expenses at 1% of exempted income by invoking the provisions of section 14A of the Act. For this,
revenue has raised following ground no.2:
"That on the facts and circumstances of the case, Ld. CIT(A) erred in law in restricting the
disallowance u/s. 14A at 1% of the exempted income since the decision of the Ld. CIT(A) is
without any basis and in contravention to the judgments of Godrej Boycee Mft. Co. Ltd. Vs. DCIT
(2010) 328 ITR 81 (Bom) which Ld. CIT(A) highlighted in his order."
10. Briefly stated facts are that the assessee derived dividend income at Rs.27,16,737/- and Long Term
Capital Gain at Rs.81,03,426/- and claimed the same as exempt u/s. 10(34) and 10(38) of the Act
respectively. The AO during the course of assessment proceedings invoked section 14A of the Act read
with Rule 8D of the I. T. Rules, 1962 and made disallowance a sum of Rs.11,30,790/-. Aggrieved,
assessee preferred appeal before CIT(A), who restricted the disallowance at 1% of the exempted income
and directed the AO accordingly. Aggrieved, revenue came in appeal before us.
11. We have heard rival contention and gone through facts and circumstances of the case. We find that
the relevant assessment year involved is 2007-08 and Hon'ble Bombay High Court in the case of Godrej
& Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203, wherein it is held that Rule 8D
of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and
not retrospective. The CIT(A) restricted the disallowance at 1% of the exempted income u/s. 14A of the
Act. We find no infirmity in the order of CIT(A) and hence, the same is confirmed. This issue of
revenue's appeal is dismissed.
12. In the result, appeal of revenue is dismissed.
SB

*In favour of assessee.