Case Law Details
DCIT Vs Welspun Projects Limited (ITAT Ahmedabad)
It was also argued by the learned DR that there is no provision under the Act for amortization of the expenses. Therefore, the assessee should not be allowed the deduction of the expenses amortized in the year under consideration. Undoubtedly, the assessee has incurred the expenses on the projects which were in the nature of BOT. Thus the assessee was entitled to amortize the expenses over the concession period of these projects. For this purpose reference can also be made to the circular issued by CBDT bearing No. 09 of 2014 dated 23 April 2013.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax(Appeals)-III, Baroda, dated 23/09/2014 arising in the matter of assessment order passed under s. 143(3) r.w.s 147 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2008-2009.
2. The Revenue has raised the following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in deleting the addition on account of Cash Subsidy received from the Government without appreciating that the assessee could not prove before the A.O with cogent evidence that the cash subsidy was reduced from the expenditure incurred on the project in P & L Account, rather in assessment order it is stated that expenditure estimated has not been incurred which are on notional basis & were not supported with evidence rather proliferated artificially.
2. The appellant craves leave to add, to amend or later the above grounds as may be deemed necessary.
3. The only issue raised by the Revenue is that Ld. CIT(A) erred in deleting the addition made by the AO for Rs. 83.80 crores representing the amount of cash subsidy received from Madhya Pradesh Rajyasetu Nirman.
4. Briefly stated facts are that the assessee in the present case is a limited company and engaged in the business of Civil Engineering & Infrastructure Company. The assessee in the earlier years i.e. up-to 2005-2006 has received cash subsidy of Rs. 83.80 crores against it projects namely Hoshangabad-Harda Khandwa road project & Raisen Rahatgarh Road Project.
4.1 The assessee has shown such capital subsidy in its balance sheet under the head “Capital Reserve”. However, the assessee pointed out that the amount of cash subsidy received by it was reduced against the project cost to which it relates and the balance amount of the project cost was amortized during the concession period of the project.
4.2 However, the AO during the assessment proceedings observed certain facts as detailed below:
a. The assessee has estimated the project cost till the concession period i.e. till 2017 and against such estimated cost of the project, it has reduced the amount of subsidy and the balance amount was amortized and debited to the profit and loss accounts every year. As per the AO the project cost was calculated by the assessee on notional basis which is unwarranted under the provision of law.
b. The assessee fails to furnish the details of supporting evidences for the project cost vis-à-vis the details showing the deduction of cash subsidy from the project cost. As such the assessee has proliferated the expenses artificially.
c. There is no provision under the Income-tax Act, which authorizes the assessee to amortize the expenses which are yet to incur.
4.3 In view of the above, the AO held that the assessee should have reduced the amount of subsidy from the project expenses in the year in which it was received and remaining amount of cash subsidy should have been offered to tax. However, the assessee has not done so and has claimed the project expenses on notional basis. Accordingly, the AO treated the amount of cash subsidy of Rs.83.80 crores transferred to capital reserve account as income and added to the total income of the assessee.
5. Aggrieved assessee preferred an appeal to the Ld.CIT(A), who deleted the addition made by the AO by observing as under:
5.3. I have considered the appellant’s submission and the AO’s observations. It is an established fact that the cash subsidies of Rs.83,80 crores had been received by the appellant during the previous years prior to the previous year of the current assessment year. Under such circumstances, the taxability of the same is required to be seen during the previous years in which the cash subsidies were received. These facts were furnished before the AO by the appellant and the same has been reproduced in the assessment order also. The appellant had also submitted that the subsidies received by it had been reduced from the cost of the project and the reduced cost of the project had been amortized over the period for which the concession had been granted to the appellant. The appellant had also submitted that though the cash subsidy of Rs. 83.80 crores had been separately shown as capital with the accounting standard 12 relating to accounting of government grants, but while claiming depreciation, the cost of the project was reduced by the amount of subsidy. The AO rejected this claim by stating that the expenditure estimated by the assessee on the whole project has not been incurred but had been calculated on notional basis. Secondly, she held that there is no provision of section or section in Income Tax Act which says that the expenditure of this nature can be amortized. Thirdly, again she stated that the subsidy should have been reduced from the cost of project expenditure in the year in which it was received and the remaining net subsidy should have been shown as income for that year.
5.3.1. The appellant during the course of appellate proceedings have again explained the method of accounting and have also stated that the expenditure on the projects were not notional but were actual expenditure incurred and from such actual expenditure the subsidy had been reduced and balance amount was amortized over the concession period. On verification of the accounts furnished by the appellant, these facts are found to be correct. Moreover, the method followed by the appellant for amortizing the actual expenditure on project net of subsidy has also been approved by the CBDT vide its Circular No. 09 of 2014 dated 23.4.2013. The method of accounting approved by the CBDT in this Circular is the same which has been followed by the appellant.
5.3.2. Thus, the addition made by the AO cannot be sustained on both counts i.e. the cash subsidy even if taxable can be taxed only in the year of I receipt and secondly, the appellant has already reduced the cash subsidy from the expenditure incurred on the project in the earlier years and the net amount has been amortized over the concession period. Thus, there is no income which can be added to the income of the current year. Hence, the addition made by the AO is directed to be deleted and this ground of appeal is allowed.
6. Being aggrieved by the order of the Ld. CIT(A) the Revenue is in appeal before us.
7. The Ld. DR, before us submitted that the amount of cash subsidy should have been offered to tax instead of showing it in the balance sheet under the head “Capital Reserve”. It is because the amount of cash subsidy directly relates to the project of the assessee.
7.1 As such the assessee on one hand is claiming the expenses incurred on the project and that too without setting off the amount of cash subsidy received by it.
8. On the other hand the ld. AR, before us filed a paper book running from pages 1 to 333 and submitted that the amount of cash subsidy was received up-to the year 2005-2006 and therefore if at all the same is subject to tax then it can be done in that very year and not in the year under the consideration.
9. It was also pointed out by the ld. AR that the assessee has incurred the actual cost with respect to the project under consideration and thereafter the amount of cash subsidy reduced and balance amount was amortized over the concession period of the project.
10. Both the ld. DR and ld. AR before us vehemently supported the order of the authorities below to the extent favorable to them.
11. We heard the rival contentions of both the parties and perused the materials available on record. It was observed by the AO that the assessee was to incur the expenses with respect to its 2 projects namely Hoshangabad -Hardakhandwa Road Project and Raisen Rahatgarh Road Project up to the year 2017. But the assessee has claimed the future expenses with respect to such projects in the year under consideration on notional basis which were amortized. As per the AO, there was no provision under the Act for claiming the amortization of the future expenses.
11.1 Likewise, the subsidy received by the assessee with respect to the projects as mentioned above should have been reduced from the cost of the projects and the remaining net subsidy should have been accounted for as income in the books of accounts. But the assessee has shown such subsidy in its balance sheet under the head capital reserve. Thus the AO treated the subsidy amounting to ₹ 83.80 crores as income of the assessee.
11.2 However, the learned CIT (A) was pleased to delete the addition made by the AO for 2 reasons. Firstly subsidy was received by the assessee in the earlier years and therefore if at all it was to be subjected to tax then it should have been done in the year in which it was received. In other words the amount of subsidy received by the assessee in the earlier years cannot be added to the income of the year under consideration. Secondly, the assessee has incurred the expenses with respect to the projects as discussed above on actual basis which is evident from the financial statement of the assessee. Likewise, the assessee for the purpose of income tax has amortized the project expenses over the concession period of projects after reducing the subsidy amount of ₹ 83.80 crores received by it in the earlier years.
11.3 Now the controversy arises for our adjudication so as to whether the amount of subsidy received by the assessee in the earlier years amounting to ₹ 83.80 crores is subject to tax in the year under consideration. There is no ambiguity to the fact that the assessee has received subsidy of ₹ 83.80 crores up to the year 2005-06 with respect to the projects as discussed above. This observation can also be seen from the order of the AO which is reproduced as under:
Cash Subsidy Received
It was noticed from the assessment records that the assessee had received cash subsidy of Rs.83.80 crore upto 2005-06 in respect of their Hoshangabad-harda-Khandwa and Raisen-Tahatgarh road Projects and shown the same “Capital Reserve” in their accounts.
11.4 From the above observation of the AO, it is clear that the amount of subsidy was received by the assessee in the earlier years. Therefore, in our considered view same cannot be subject to tax in the year under consideration. Accordingly, we hold that the AO has exceeded his jurisdiction by adding the amount of subsidy received by the assessee in the earlier year to the total income of the assessee for the year under consideration.
11.5 Moving further, we also note that the assessee has incurred actual expenses with respect to the projects as discussed above. This fact can also be verified from the audited financial statements for the year under consideration which are placed on pages 16 to 105 of the paper book. Besides this we also note that the assessee on our request has also filed the financial statements of the earlier years i.e. 2005-06 and 2006-07 which are placed on record wherein the cost incurred by the assessee with respect to the projects in dispute were duly reflected. Thus, we hold that the finding of the AO that the assessee has claimed expenditure on notional basis is devoid of any merit. At the time of hearing, the learned DR has also not brought anything on record contrary to the finding of the learned CIT (A).
11.6 Admittedly, the amount of capital subsidy received by the assessee in the earlier years was shown under the head capital reserve in the financial statements prepared under the Companies Act. However the assessee, while amortizing the project expenses has adjusted the amount of subsidy in the profit and loss account. This fact can also be verified from the financial statement of the assessee which are placed on record. Accordingly we hold that the finding of the AO that assessee has not adjusted the amount of capital subsidy against the project expenses is devoid of any merit. At the time of hearing, the learned DR has also not brought anything on record contrary to the finding of the learned CIT (A).
11.7 It was also argued by the learned DR that there is no provision under the Act for amortization of the expenses. Therefore, the assessee should not be allowed the deduction of the expenses amortized in the year under consideration. Undoubtedly, the assessee has incurred the expenses on the projects which were in the nature of BOT. Thus the assessee was entitled to amortize the expenses over the concession period of these projects. For this purpose reference can also be made to the circular issued by CBDT bearing No. 09 of 2014 dated 23 April 2013. The relevant extract of the circular is reproduced as under:
4. There is no doubt that where the assessee incurs expenditure on a project for development of roads/highways, he is entitled to recover cost incurred by him towards development of such facility (comprising of construction cost and other pre-operative expenses) during the construction period. Further, expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit in the form of right to collect the toll during the period of the agreement. Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT in 225 ITR 802 = 2002-TIOL-290-SC-IT-LB allowed spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on an infrastructure project for development of roads/highways under BOT agreement may be treated as having been made/incurred for the purposes of business or profession of the assessee and same may be allowed to be spread during the tenure of concessionaire agreement.
5. In view of above, Central Board of Direct Taxes, in exercise of the powers conferred under section 119 of the Act hereby clarifies that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Act.
6. The amortization allowable may be computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortized evenly over the period of concessionaire agreement after excluding the time take for creation of such facility.
11.8 In view of the above and after considering the facts in totality, we do not find any reason to interfere in the finding of the learned CIT (A). Hence the ground of appeal of the Revenue is hereby dismissed.
12. In the result the appeal filed by the Revenue is dismissed.
Order pronounced in the Court on 12/08/2021 at Ahmedabad.
