USA is not a person or authority under the Indian Income Tax Act, subsidy or grant received from it does not attract Explanation 10 to section 43(1), extraction of coal from mines and processing thereof tantamounts to production
Explanation 10 to section 43(1) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) explains 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:
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.
In Spectrum Coal & Power Ltd (Formerly ST-CLI Coal Washeries Ltd), New Delhi vs. ACIT Circle 1(3)/DCIT Circle 1(3) Mumbai [ITA Nos. 1295/Mum/2012, 1296/Mum/2012, 1880/Mum/2010, 1881/Mum/2010, 898/Mum/2013, 899/Mum/2013, 900/Mum/2013; decided on 3 August 2017], the following common grounds were raised before Mumbai ITAT:
a. That in the facts & circumstances of the case, the CIT(A) and Assessing Officer(AO) 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 Act.
b. That the AO 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 of 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.
c. That the CIT(A) and AO 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.
The facts relating to the above grounds in brief were that the AO 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 Act. This resulted in excess allowance of depreciation as claimed by the assessee while the case was processed under section 143(1) of the Act. The AO 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 Act. While framing the assessment under section 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 AO to adjudicate afresh the issue in accordance with law, after giving adequate opportunity of hearing to the assessee. The AO 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 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 AO.
On appeal to ITAT, Mumbai, the learned Members observed that the grant as per agreement was conditional one. The grant so received by the assessee was a financial arrangement and could not be regarded to be a subsidy grant.
Section 43(1) defines the actual cost to mean the actual cost of the assets of the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by other person or authority.
From the reading of the section 2(31) of the Act, the learned Members held that USA cannot be regarded to be a person under the Act. Even on this basis also financial assistance given by ICICI could not be regarded to be a cost met directly or indirectly by any other person.
Following the legal position explained by the Hon’ble Supreme Court in the case of P J Chemicals ( 210 ITR 830), the learned Members of the Mumbai, ITAT held that the captioned financial grant received by the assessee could not be reduced from the actual cost of fixed assets for computing the depreciation under the Act.
Hon’ble Supreme Court in the case of CIT vs. Sesa Goa Ltd.  271 ITR 331 (SC), has held that extraction and processing of mineral ore amounts to “production”. In view of the said decision, the Mumbai, ITAT, also, held that extraction of coal and processing thereof will tantamount to production and converting raw coal into beneficiated coal is a manufacturing process, as beneficiated coal is a different marketable product.