Sales tax subsidy ruled as capital receipt not taxable; Assessing Officer to review depreciation & interest claims

The Tribunal held that the sales tax subsidy received by the assessee should be treated as a capital receipt and not taxable. It directed the Assessing Officer to consider the assessee's claim for depreciation on payments made for laying a 132KV electric transmission line. Additionally, the Tribunal instructed the AO to verify the interest claim under section 244A and examine the admissibility of depreciation on capital expenditure incurred for laying a transmission line and constructing an access road at the Vizag factory.

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Issues Involved:
1. Treatment of sales tax exemption as operational subsidy vs. capital receipt.
2. Disallowance of depreciation on payment made to MSEB for laying 132KV electric transmission line.
3. Grant of interest under section 244A of the Income Tax Act.
4. Disallowance of expenditure incurred for laying transmission line and construction of access road in factory premises at Vizag.

Issue-wise Detailed Analysis:

1. Treatment of Sales Tax Exemption as Operational Subsidy vs. Capital Receipt
The primary issue was whether the sales tax exemption availed by the assessee from the State Government for setting up an industry in a notified area should be treated as an operational subsidy or a capital receipt. The assessee contended that the sales tax incentive should be treated as a capital receipt based on the purposive test, which examines the purpose for which the subsidy was granted. The assessee argued that the subsidy was meant to encourage industrialization in backward areas by requiring industries to either set up a new unit or make significant capital investments.

The Tribunal analyzed the U.P. Government's subsidy scheme and concluded that the subsidy was indeed intended to promote industrialization in specific areas by encouraging new units or expansion of existing units with substantial fixed capital investments. The Tribunal applied the purposive test as laid down by the Hon'ble Supreme Court in CIT v/s Ponni Sugars and Chemicals Ltd., and CIT v/s Chaphalkar Brothers, determining that the subsidy was for capital purposes. Consequently, the sales tax subsidy received by the assessee was held to be a capital receipt and not taxable.

2. Disallowance of Depreciation on Payment Made to MSEB for Laying 132KV Electric Transmission Line
The assessee initially claimed the expenditure incurred for laying a 132KV electric transmission line as a revenue expenditure, which was disallowed by the Assessing Officer (AO) and subsequently upheld by the Tribunal as capital expenditure. The assessee then claimed depreciation on this capital expenditure, which the Commissioner (Appeals) rejected on the grounds that the Tribunal had not issued a specific direction for allowing depreciation.

The Tribunal clarified that once an expenditure is held as capital, the consequential benefits, such as depreciation, should automatically follow. Therefore, the Tribunal directed the AO to consider the assessee's claim for depreciation on the payments made to MSEB.

3. Grant of Interest Under Section 244A of the Income Tax Act
The assessee challenged the withdrawal of interest under section 244A, which was initially granted during the original assessment but withdrawn after giving effect to the Tribunal's order. The assessee argued that the income computed under MAT provisions remained unchanged, and thus, the interest should not have been withdrawn.

The Tribunal found that the Commissioner (Appeals) had already directed the AO to calculate the interest allowable under the provisions of the Act. The Tribunal further directed the AO to verify the assessee's claim and decide the issue in accordance with the relevant statutory provisions.

4. Disallowance of Expenditure Incurred for Laying Transmission Line and Construction of Access Road in Factory Premises at Vizag
The assessee incurred expenditure for laying a transmission line and constructing an access road at its Vizag factory, initially claimed as revenue expenditure but held as capital in nature by the Tribunal. The issue was restored to the AO to allow depreciation on this capital expenditure.

The Tribunal upheld the decision of the Commissioner (Appeals) to direct the AO to examine the admissibility of depreciation in respect of the capital expenditure incurred. The Tribunal instructed the AO to comply with the Tribunal's earlier directions and decide the matter afresh.

Summary of Decisions:
- ITA no.3938/Mum./2013: Allowed the assessee's claim of sales tax subsidy as a capital receipt.
- ITA no.2197/Mum./2014: Partly allowed; directed the AO to consider the assessee's claim of depreciation on payments made to MSEB.
- ITA no.2198/Mum./2014: Partly allowed; directed the AO to consider the assessee's claim of depreciation and to verify the interest claim under section 244A.
- ITA no.7062/Mum./2014: Partly allowed; directed the AO to consider the assessee's claim of depreciation and to comply with the Tribunal's earlier directions regarding the capital expenditure at Vizag factory.

Order pronounced in the open Court on 18.04.2018.

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