Subsidy towards power generation plant is to be reduced from actual cost of plant for allowing depreciation u/s. 32
HIGH COURT OF KARNATAKA
Commissioner of Income-tax, Circle -2
Shree Renuka Sugars Ltd.
IT APPEAL NOS. 5006 & 5007 OF 2011
AUGUST 31, 2012
Dr. K. Bhakthavatsala, J. – Those two Appeals filed by the Revenue are directed against the common order dated 2.12.2010 made in ITA Nos.130 and 131/Panaji/2009 on the file of Income Tax Appellate Tribunal (ITAT), Panaji Bench at Panaji.
2. We are proceeding to dispose off these two Appeals by this common judgment.
3. Brief facts of the case leading to the filing of the Appeals may be stated as under:
Respondent (in short, ‘the assessee’) is carrying on business in manufacturing sugar, ethanol, rectified spirit and co-generation of power and sales. For the assessment years 2001-02 and 2006-07, the assessee filed return of income on 30.10.2001 and on 5.11.2005, respectively. The assessee deducted total loss of Rs. 17,18,36,722/- for the assessment year 2001-02 and also showed subsidy amount of Rs. 93,75,000/- received from the Government of Karnataka under the head “Reserve and Surplus”, The assessee declared income of Rs. 50,21,96,567/- for the assessment year 2006-07, without deducting subsidy of Rs. 1,87,50,000/- from the Government of Karnataka, from the total cost.
Notices under Sections 148 and 142(1) of the Income Tax Act were issued to the assessee to re-work the depreciation over the years and the opening of Written Down Value of the assets of the co-generation plant. After affording an opportunity to the assessee, assessment orders dated 22.12.2008 and 17.12.2008 were passed disallowing the claim for depreciation to the extent of subsidy received towards co-generation plant. The assessee challenged the order of the Assessing Officer at Annexure B in each case before the C I T (Appeals) in ITA Nos. 309 and 376/BGM/08-09. The CIT, placing reliance on the earlier order passed by the ITAT, by order dated 31.8.2009, (vide Annexure-C), allowed the Appeal and/directed the Assessing Officer not to reduce the amount of subsidy from the cost of the assets for the purpose of calculation of depreciation. Feeling aggrieved by the order at Annexure-C, the Revenue, unsuccessfully preferred Appeals before the ITAT at Panaji in Nos.130 and 13]/Panaji/2009. The Tribunal dismissed both the Appeals on 2.12.2010, confirming the order of the CIT (Appeals). This is impugned in this Appeal.
4. Revenue has raised the following common substantial questions of law in the above-said Appeals:
“(i) Whether the Tribunal was right in law in holding that the capital subsidy received from the Government for commissioning Co-Generation Power Plant should not be reduced from cost of assets for calculating depreciation even after introduction of Explanation 10 to Section 43(1) of the Income Tax Act, 1961 with effect from 1.4.1999?
(ii) Whether the Tribunal was correct in applying the principles of the Bombay High Court decision reported in 235 ITR 780 in the case of Menezes Pnarmaco which was rendered much prior to the introduction of Explanation 10 to Section 43(1) of the Income Tax Act, 1961 ?
(iii) Whether the ITAT is correct in law in dismissing the appeal of the assessee by overlooking the fact that the first instalment of subsidy granted by the Government is not linked to supply of power to KEB Grid and hence, provisions of Explanation 10 to Section 43(1) is applicable to the case of the respondent assessee ?”
5. Learned Counsel for the Revenue submits that Explanation 10 to Section 43(1) is applicable to the case of the assessee and the Division Bench of this Court, by judgment dated 7.4.2011 made in IT Appeal No.284/2009 (The Commissioner of Income Tax v. Shree Renuka Sugars Ltd.) has held that “the subsidy granted by the Government shall be reduced from the cost of the assets for calculation of depreciation” and the substantial question No.(ii) was answered in favour of the Revenue.
6. Learned Counsel for the assessee admits that the assessee has received the subsidy from the Government of Karnataka for commissioning co-generation plant and the same has been accounted as per the accounting standards and the subsidy received by the assessee need not be reduced from the actual cost of the assets and there is no illegality or infirmity in the impugned order.
7. It is pertinent to mention that Explanation 10 to Section 43(1) of the Income Tax Act, 1961 was inserted and it came into force with effect from 1.4.1999. Since assessment orders are in relation to assessment years 2001-02 and 2006-09 subsequent to the insertion of the above Explanation, it is useful to excerpt Explanation 10 as well as Proviso to the above-said provision for immediate reference:
Explanation 10 of Section 43(1):
“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 it 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 reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.”
According to Explanation 10 and proviso to sub-section (1) of Section 43, of Income-tax Act, the subsidy amount shall be deducted in the actual cost of the asset of the assessee. The contention of the assessee that the subsidy received towards the Generation Plant shall not be reduced from the actual cost of the assets is not correct. The Division Bench of this Court by order dated 7.4.2011 passed in IT Appeal No. 284/2009 supra, has held that the subsidy granted by the Government shall be reduced from the cost of the assets for the purpose of calculation of depreciation. Therefore, we answer all the substantial questions of law in the negative in favour of the Revenue and against the assessee.
8. Accordingly, both the Appeals are allowed.