Spectrum Coal & Power Ltd. Vs ACIT (ITAT Mumbai)
Coal beneficiation has been defined as cost effective and significant step towards improving power plant efficiency and reducing the GHG emissions from the coal fired power plants in India would be to increase the availability of clean beneficiated coals using appropriate beneficiation technologies. In fact, it improves the quality of coal. From the note it is not denied that it is not for the improvement in the coal beneficiating activity for power grade coal. Power grade coal is the existing business of the assessee. This means improvement in the coal beneficiation effects the day to day business of the assessee and improves the operations of the existing business. It does not relate to a new product and, therefore, in our view the case of the assessee is duly covered by the aforesaid finding of the Hon’ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. We also noted that the Supreme Court in the case of Empire Jute Co0. Ltd. vs. CIT 124 ITR 1 (SC) has observed that here may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. Since the expenditure incurred is for the improvement of the existing business and has not created a new business for the assessee, therefore, it will be a revenue expense.
Held: There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. As, in the instant case coal beneficiation effected day-to-day business of assessee, however, the expenditure incurred was for improvement of the existing business and had not created a new business for the assessee, therefore, was allowable as revenue expense.
2. Extraction of coal and processing thereof tantamounted to production and converting raw coal into beneficiated coal was a manufacturing process, as beneficiated coal is a different marketable product. Accordingly, AO was not justified in disallowing additional depreciation.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
All these appeals since relate to the same assessee, therefore, they are being disposed of by this common order.
2. The grounds of appeal in ITA No. 1295/Mum/2012 for AY 2000-01 & ITA No. 1296/Mum/2012 for AY 2001-02 are common. In both these appeals the assessee has taken as many as eight grounds of appeal. Ground no.1, 7 & 8 are general in nature, therefore, does not require any adjudication. Ground nos. 5 & 6 were not pressed in both the ears and, therefore, dismissed as not pressed. The only common grounds, which survive for our adjudication, read as under:
“2. That in the facts & circumstances of the case, the CIT(A) and Assessing Officer has erred on facts and in law in reducing the value of plant and machinery by Rs.9,97,28,611/- for A.Y. 2000-01 for the purpose of allowing depreciation under the Income Tax Act, 1961.
3. That the Assessing Officer has erred on facts and in law in treating the amount of Rs.9,97,28,611/- as “cost borne by any other person or authority” and reducing the same from the cost o f plants and machinery for the purpose of allowing depreciation for A.Y. 2000-01 and CIT(A) has erred in law and facts in upholding the same.
4. That the CIT(A) and Assessing Officer has failed to appreciate that the said amount of Rs.9,97,28,611/- received as a conditional grant which is in the shape of a loan repayable @200% of the said amount under the PACER agreement. ”
3. At the outset, both the parties agreed that similar grounds have been taken as ground nos.4 & 5 in A.Y. 2004-05, ground no.3 in A.Ys. 2005-06, 2006-07 and 2007-08. Both the parties agreed that the grounds relate to the claim of depreciation by the assessee. It was also agreed that these grounds be decided on the basis of the facts involved for A.Y. 2000-01 and whatever view may be taken by this Tribunal for A.Y. 2000-01, the same may be taken in all other years also.
4. The facts relating to these grounds are that the Assessing Officer noted that the assessee had received a sum of ` 9,97,28,611/- from US Aid through ICICI under the Program for Acceleration of Commercial Energy Research (PACER) in the years 1996-97, and 1997-98, which was credited to the capital reserve in the balance sheet of the company’s accounts. In the F.Y. 1999-2000, the assessee company had adjusted this amount against the investment in plant and machinery made during the year. However, the cost of plant & machinery was not reduced to this extent while calculating the written down value (WDV) for the purpose of determining the depreciation as per the provisions of the Income tax Act. This resulted in excess allowance of depreciation as claimed by the assessee while the case was processed u/s. 143(1). The Assessing Officer treated the grant received by the assessee from US Aid through ICICI as cost met directly or indirectly by any other person or authority as per the provisions of Section 43 of the I.T.Act. While framing the assessment u/s 143(3), the first appellate authority dismissed the appeal of the assessee vide order dated 27.02.2006. When the matter went in first round before the ITAT, the Tribunal set aside the assessment and directed the Assessing Officer to adjudicate afresh the issue in accordance with law, after giving adequate opportunity of hearing to the assessee. The Assessing Officer took the view that the amount of the grant received under PACER from US aid through ICICI amounted to cost met by US aid on the purchase of plant and machinery by the assessee company as per the provisions of Section 43(1) of the IT Act and, therefore, he took the WDV of the plant and machinery for the purpose of calculation of depreciation at the cost of plant and machinery reduced by the amount of grant received by the assessee company from US aid through ICICI under PACER. The assessee went in appeal before the CIT(A). The CIT(A) confirmed the order of the Assessing Officer by observing as under:
3.3.1 On the first issue, whether the amount of grant received by the Appellant Company from ICICI Ltd. Mumbai under PACER agreement, is a loan or an assistance, I am inclined to agree with the views of the assessing officer that this amount of Rs. 9,97,28,611/- received by the Appellant Company is a Conditiona l grant and not a loan, It is noted that the first agreement was signed between ICICI Ltd. and US Agency for International Development (USAID) dated 31/08/1987 wherein USAID had agreed to give project grant for Programme for Acceleration for Commercial Energy Research (PACER) and ICICI Ltd was to disburse the grant funds received under AID grant for financing o f approved sub-projects. USAID had contributed 20 Million Dollars for this project. And in this agreement, there was no provision for return of grant by the ICICI Ltd. back to USAID. The ICICI Ltd was to provide in kind support sufficient to meet the purposes of the project and the sub project participants to contribute an amount o f not less than 40% of the total cost of the project. Whereas in the Second agreement between the ICICI Ltd. and the Appellant Company dated 12 Sept, 1996 titled “Agreement for PACER assistance” the ICICI Ltd. has agreed to provide finance for the implementation of the proposal given by the Appellant Company. This conditional grant was to be disbursed only up to 31st August 1997 as per Clause C1 of this agreement, it was agreed that the Appellant Company shall make payments to ICICI based on gross annual sales derived from the commercial exploitation of the innovation commencing with the first such'” commercial transaction. Such payments shall be made on the following basis subject to the maximum 200% of the conditional Grant in any event. An amount equivalent to one hundred percent of the conditional grant shall be paid to ICICI Ltd at the rate of (i) 4% of the gross annual sales o f the coal beneficiated in the future project, (ii) 2% of the gross annual sales of the coal beneficiated in the proposed commercial project. 1 find it very strange that on one hand ICICI Ltd. is getting USAID for PACER project on Non returnable basis, on the other hand, ICICI Ltd is making this grant conditional for the Appellant Company demanding double the amount of the grarlt given to the Appellant Company over a period of time when the grant given to the appellant company is returnable to the ICICI Ltd. by twice the amount of grant taken for PACER project then how such grant can be taken to be in the nature of Grant/Assistance/subsidy/aid was argued by the authorized representative. However in my view, after examining both agreements and clauses therein, the preponderance of probability suggests that the origin of this amount is from a AID project run by USAID and the amount was given to the Ltd. for running a specific energy project under PACER. However, the ICICI Ltd. has turned this assistance into a conditional grant while extending this amount to the Appellant Company, repayable amount, being twice the amount of conditional grant given as a royalty linked to the sales. It is also a fact that the Appellant Company had returned a sum of Rs. 20 Lac to the ICICI Ltd. as a Royalty as per agreement, however thereafter no payments have been made by the Appellant Company to the ICICI Ltd. Neither the ICICI Ltd. has recovered the balance amount of royalty from the Appellant Company as per agreement nor the Appellant Company has provided for any Royalty payable to the ICICI Ltd, in its books of accounts. The conduct of the Appellant company and its method of accounting over many assessment years show that it has treated this conditional grant given by the ICICI Ltd. as an aid/assistance/grant/subsidy and not as a loan. No royalty was repaid or repayable by the Appellant company to the ICICI Ltd. after making a payment of Rs.20 lacs to the ICICI Ltd. Therefore, I find no infirmity in the assessment order of Assessing Officer wherein he has held that this amount given by ICICI Ltd. to the Appellant Company is basically an aid/assistance/grant/subsidy and not in the nature of loan given to the Appellant Company. In case, the amount given by the ICICI Ltd. was a loan in that case, the ICICI Ltd, should have charged interest on the amount given to the Appellant Company. However, the agreement between the Appellant Company and the ICICI Ltd. does not show any clause wherein it is written that loan was repayable on interest. Consequently, I find no merit in the argument of the authorized representative of the Appellant Company that such amount may be treated as a loan when the entire transaction as per agreements deals with aid or grant given to the Appellant Company under PACER agreement. Therefore, all these grounds No. 2 to 5 are dismissed. Further, the sixth ground of appeal is also decided against the Appellant Company because no provision for payment of royalty to the ICICI Ltd, was made in the books of accounts o f the Appellant Company, in case, any royalty was payable as a genuine business expenditure by the Appellant Company to the ICICI Ltd., in that case the Appellant Company must have made a provision in its books of accounts for making such payment. Therefore, it is apparent that the Appellant Company has treated the amount received from ICICI Ltd. as a onetime grant / assistance which was not returnable by the Appellant Company.
3.3.2 On the Second issue, whether the amount of grant should be reduced from the cost of assets or not for granting Depreciation, I am of the view that the Explanation 10 to Section 43(1) will cover all kind of grants conditional or otherwise, irrespective of their purposes and must be reduced to work out the actual cost under Section 43(1) of the Income Tax Act, 1961. To sum up, 1 find no reason to interfere with the order of Assessing officer wherein he has granted Depreciation on the assets to the Appellant Company after reducing the amount of grant received by the Appellant Company.
5. The learned AR before us drew our attention to page 116 of the paper-book and contended that there was a project grant agreement between ICICI & the USA for Program for Acceleration of Commercial Energy Research. Referring to page 118, it was pointed out that the purpose of this agreement was to set up the understandings of the parties with respect to the undertaking by ICICI of the project described at page 119 and with respect to the financing of the project. Referring to page 119 it was pointed out that the project is defined with three inter related components for seeking to create an institutional environment for relevant technology innovation in the energy sector. ICICI will disburse grand funds received under AID grant for financing of approved subprojects and related activities and organize secretariat for the executing of the project. Our attention was drawn towards Section 43(1), which defines the “actual cost” means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. On the basis of this definition, it was contended that for the purpose of determining the actual cost only that portions will be reduced from the actual cost which has to be met by any other person or authority. In this case, the grant under the agreement has been given not by any person or the authority; it has been given by USA, which is sovereign. Our attention was also drawn towards Explanation 10 to Section 43. On the basis of this explanation, it was contended that only that portion of the cost of assets acquired by the assessee, which has been met directly or indirectly by the Central Government or the State Government or any authority established under any law or by any person in the form of subsidy or grant or reimbursement has to be reduced from the actual cost of assets for the purpose of depreciation. USA is neither Central Government/State Government entity nor any authority established under any law in India. Even otherwise, it was contended that in view of the decision of the Visakhapatnam Bench of this Tribunal in the case of Sasisri Extractions Limited v. ACIT (122 ITD 428) and the decision of Kolkata Bench of the Tribunal in the case of Universal Cables Limited vs. DCIT (57 taxmann.com 95), even after insertion of Explanation 10 to Section 43(1), there is no change in the basic concept and the first test has to be satisfied is that the portion of the cost of asset should be met either directly or indirectly by any authority either in the form of subsidy or otherwise. So long as the subsidy was intended to encourage entrepreneurs to establish industries, the mere fact that a specified percentage of the fixed capital cost was taken as the basis for determining the subsidy should not be mistaken as a payment intended to subsidize the cost of capital of the new industry. It was pointed out that even after the insertion of Explanation 10 to Section 43(1), the basic principle underlying in the decision of Apex Court in the case of P J Chemicals Ltd 210 ITR 830 (SC) still holds good. In that decision, their Lordships analyzed 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. In this case, grant was not given to meet the cost of any specific asset but to create an institutional environment for our technology innovation in the energy sector. It was further contended that in the case of the assessee, the grant was given for setting up advanced plant for beneficiation of high ash Indian coal as an integrated coal beneficiation plant. Our attention was also drawn towards agreement for PACER assistance entered into between ICICI and the assessee. On this basis, it was stated that as per clause ‘C’ the agreement was for financing out the PACER Grant Resources and ICICI has agreed to provide finance for the implementation of the proposal. This grant was repayable by the assessee although there was no limitation for the repayment. The repayment has to be made @2% of the gross annual sales of the coal beneficiated in the proposed commercial project but subject to the condition that the repayment amount will not exceed 100% of conditional grant. The assessee has paid back a sum of ` 20 lacs. For the terms and conditions, our attention was drawn towards clause C.1. of the agreement appearing at page 98 of the paper-book. Thus, it was contended that it was a financing arrangement and in fact not a subsidy or a grant. Further, it was submitted that during the assessment years 2003-04, 2009-09 and 2009-10, the Assessing Officer after examining the issue, allowed the claim of the assessee by passing order u/s. 143(3). Therefore, in view of res adjudicate and following the principle of consistency, depreciation should be allowed to the assessee. In this regard reliance was placed on the following decisions:
CIT vs. Gopal Purohit 336 ITR 287 (Bom)
