2017 (8) TMI 915 - AT - Income Tax

Tribunal favors assessee on tax issues involving PACER grant, technical report spend, repairs.

The Tribunal ruled in favor of the assessee on various issues including the treatment of a grant received under PACER, technical report expenditure, and ... Excess allowance of depreciation - grant from US Aid through ICICI under the Program for Acceleration of Commercial Energy Research (PACER) - assessee company had adjusted this amount against the investment in plant and machinery made during the year but 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 - whether the said grant has to be reduced from the WDV of the plant & machinery for the purpose of allowance of depreciation? Held that:- The contention of the learned DR that the assessee has credited the said amount to the assets in the books of account will not make any difference. As to claiming of the depreciation by the assessee in the income tax return, in view of the decision of the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971 (8) TMI 10 - SUPREME Court) wherein it has been held that whether the assessee is entitled to a part deduction or not will depend on the provision of the law relating thereto and not on the view which the assessee may take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. In view of our aforesaid discussion, we set aside the order of the CIT(A) in each of the assessment years on this issue and direct the Assessing Officer to allow depreciation to the assessee without deducting the amount of the conditional grant received by the assessee from the actual cost/WDV of the plant and machinery. Thus, this ground in each of the assessment years is allowed in favour of assessee Expenditure incurred on obtaining a technical report - expenditure incurred on acquiring a capital asset OR revenue expenditure - Held that:- We noted that 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. 1989 (3) TMI 5 - SUPREME Court. We also noted that the Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980 (5) TMI 1 - SUPREME Court ) 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. Expenses on repairs and maintenance of roads and bridges - revenue or capital expenditure - Held that:- The expenditure incurred on the construction of roads and bridges, although termed as ‘repairs and maintenance of roads and bridges’ has to be regarded as capital expenditure. Further, we also noted that, the Assessing Officer while making assessment u/s. 143(3) for A.Ys 2003-04 and 2009-10, similar expenditure has been allowed by in as revenue expenditure. There is no change in the facts in the impugned assessment years as compared to A.Ys. 2003-04 and 2009-10. In view of the decision of jurisdictional High Court in the case of CIT vs. Gopal Purohit (2010 (1) TMI 7 - BOMBAY HIGH COURT) the principle of consistency has to be followed. Additional depreciation on Plant & Machinery - whether the assessee is in the business of coal beneficiation only and no new product is manufactured - Held that:- We noted that this issue is no more res integra in view of the decision of Hon’ble Supreme Court in the case of CIT vs. Sesa Goa Ltd. (2004 (11) TMI 14 - SUPREME Court) in which has held that extraction and processing of mineral ore amounts to “production”. In view of the said decision, 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. No contrary decision was brought to our knowledge. We, therefore, confirm the order of the CIT(A) and dismiss the ground taken by the Revenue. Issues Involved:1. Reduction of the value of plant and machinery for depreciation purposes.2. Treatment of the grant received under PACER as a loan or assistance.3. Treatment of expenditure on technical reports as capital or revenue expenditure.4. Treatment of expenses on repairs and maintenance of roads and bridges as capital or revenue expenditure.5. Disallowance of non-competition fees.6. Eligibility for additional depreciation on plant and machinery.Issue-wise Detailed Analysis:1. Reduction of the value of plant and machinery for depreciation purposes:The assessee received a grant of Rs. 9,97,28,611 from US Aid through ICICI under the PACER program, which was credited to the capital reserve and adjusted against the investment in plant and machinery. The Assessing Officer reduced this amount from the cost of plant and machinery for depreciation purposes, treating it as a cost met by another person under Section 43 of the Income Tax Act. The CIT(A) upheld this view, considering the grant as a conditional grant rather than a loan. The Tribunal, however, concluded that the grant was a financial arrangement and not a subsidy or grant, thus should not be reduced from the actual cost of the assets for depreciation calculation, following the precedent set by the Supreme Court in P J Chemicals Ltd.2. Treatment of the grant received under PACER as a loan or assistance:The CIT(A) and Assessing Officer treated the amount received as a conditional grant, not a loan. The Tribunal reviewed the agreements and determined that the grant was a financial arrangement with repayment terms, thus not fitting the definition of a subsidy or grant under Section 43(1). The Tribunal held that the grant should not be reduced from the cost of the assets for depreciation purposes.3. Treatment of expenditure on technical reports as capital or revenue expenditure:The assessee claimed Rs. 4 crores paid for a technical report as revenue expenditure, arguing it was for improving coal beneficiation activities. The Assessing Officer treated it as capital expenditure under Section 32(1)(ii). The Tribunal, referencing the Supreme Court's decision in Alembic Chemical Works Co. Ltd., held that the expenditure was for the improvement of existing business operations and thus should be treated as revenue expenditure.4. Treatment of expenses on repairs and maintenance of roads and bridges as capital or revenue expenditure:The Assessing Officer treated the expenditure on repairs and maintenance of roads and bridges as capital expenditure, citing the creation of enduring assets. The Tribunal, however, noted that similar expenditures were allowed as revenue in previous years and emphasized the principle of consistency. The Tribunal concluded that the expenses should be treated as revenue expenditure.5. Disallowance of non-competition fees:The assessee paid Rs. 6 crores as non-compete fees to Reliance Energy Ltd., which was partially disallowed by the Assessing Officer. The Tribunal restored the issue to the CIT(A) for fresh adjudication, noting that the CIT(A) had not adjudicated the additional ground raised by the assessee. The Tribunal emphasized that the expenditure was revenue in nature and should be reconsidered.6. Eligibility for additional depreciation on plant and machinery:The Assessing Officer disallowed additional depreciation, arguing that coal beneficiation did not constitute manufacturing. The CIT(A) and Tribunal disagreed, citing the Supreme Court's decision in Sesa Goa Ltd., which recognized processing of minerals as production. The Tribunal confirmed that beneficiated coal is a commercially different product, thus qualifying for additional depreciation.Conclusion:The Tribunal allowed the assessee's appeals on the grounds of depreciation calculation, treatment of technical report expenditure, and repairs and maintenance expenses, while directing the CIT(A) to reconsider the non-compete fees issue. The Tribunal also upheld the assessee's eligibility for additional depreciation, dismissing the Revenue's appeal.