Subsidy for Capital Investment Not Taxable; Depreciation Rate Remanded for Review

The Tribunal upheld the CIT(A)'s decision that the subsidy received by the assessee should be treated as a capital receipt, not chargeable to tax, as it was intended for fixed capital investment in setting up a new industrial unit in a backward area. However, the issue of depreciation on moulds used by the assessee was remanded back to the AO for further examination to determine the appropriate depreciation rate.

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Issues Involved:
1. Treatment of subsidy as capital or revenue receipt.
2. Allowance of depreciation on moulds.

Detailed Analysis:

1. Treatment of Subsidy as Capital or Revenue Receipt:

The primary issue revolves around whether the subsidy received by the assessee from the West Bengal Industrial Development Corporation (WBIDC) should be treated as a capital receipt or a revenue receipt. The subsidy amounting to Rs. 31,15,000 was received under the West Bengal Incentive Scheme 2000, which aimed to promote industries in backward areas. The assessee argued that the subsidy was a capital receipt, not chargeable to tax, as it was intended for fixed capital investment in setting up a new industrial unit in a backward area.

The Assessing Officer (AO) contended that since the subsidy was deposited in the cash credit account of the assessee, it became part of the general pool of funds and should be treated as revenue in nature. The AO also pointed out that the assessee claimed depreciation on the full amount of the written down value (W.O.V.) of plant and machinery without adjusting the subsidy amount, indicating that the subsidy was revenue in nature.

The CIT(A) ruled in favor of the assessee, stating that the subsidy was granted before the commencement of production and was related to fixed capital investment, thus qualifying as a capital receipt. The CIT(A) relied on the Supreme Court judgments in the cases of PJ Chemicals Ltd (1994) 210 ITR 830 (SC) and Senairam, Durgamall 42 ITR 392 (SC), as well as the ITAT Kolkata Bench decision in Rasoi Ltd Vs Dy Commissioner of Income Tax, which supported the view that subsidies intended for fixed capital investment are capital receipts.

The Tribunal upheld the CIT(A)'s decision, emphasizing the "Purpose Test" established by the Supreme Court in CIT, Madras vs. Ponni Sugars & Chemicals Limited, which determines the nature of a subsidy based on its objective. Since the subsidy in question aimed to promote industrial development in backward areas and was linked to fixed capital investment, it was deemed a capital receipt.

2. Allowance of Depreciation on Moulds:

The second issue concerns the rate of depreciation applicable to moulds used by the assessee. The AO observed that the assessee claimed depreciation at 30% on moulds, while the AO believed that moulds should be treated as plant and machinery, warranting a depreciation rate of 15%. Consequently, the AO added back Rs. 12,54,893 to the total income of the assessee.

The CIT(A) disagreed with the AO, noting that as per Section 32 and Rule 5 of the Income Tax Act, depreciation is allowable at 80% for moulds used in the iron and steel industry. The CIT(A) pointed out that the assessee had only claimed 30% depreciation, which was lower than the allowable rate.

The Tribunal, however, found that the issue required further examination by the AO. The Tribunal highlighted that there was no basis to conclude that rolling mills used in the iron and steel industry are equivalent to moulds in a rolling form. The Tribunal directed the AO to reassess the claim of the assessee with technical and expert evidence to determine whether the moulds used in the iron and steel industry are materially the same as those used in rubber and plastic manufacture, which are entitled to higher depreciation.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decision regarding the subsidy being a capital receipt but remanded the issue of depreciation on moulds back to the AO for further examination. The order was pronounced in the court on 6.4.2016.

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