2020 (4) TMI 86 - AT - Income Tax

Excise duty refund is a revenue receipt, Tribunal confirms. Depreciation disallowance deleted.

The Tribunal dismissed the Revenue's appeals for both assessment years, affirming the CIT(A)'s decision that the excise duty refund is a revenue receipt. ... Disallowance of depreciation u/s 32(1) r.w.s. 43(l) - assets of the demerged units included asset acquired out of Excise duty exemption (accounted as deferred government grants in the books of accounts) as per scheme of investment - excise refund being revenue receipt cannot be reduced from the cost of plant & machinery - HELD THAT:- In view of the identical question of whether the receipt of excise refund is capital receipt or revenue receipt and whether same will go to reduce the actual cost of asset is involved in the year under consideration, and thus, respectfully following the finding of the Tribunal in [2018 (9) TMI 1791 - ITAT DELHI ] we uphold the finding of the Ld. CIT(A) on the issue in dispute. The grounds of the appeal raised by the Revenue in both assessment years are dismissed. Issues Involved:1. Disallowance of depreciation under section 32(1) read with section 43(1) of the Income-tax Act.2. Treatment of excise refund as revenue receipt and its impact on the cost of plant and machinery.Issue-wise Detailed Analysis:1. Disallowance of Depreciation under Section 32(1) r.w.s. 43(1) of the Act:The primary issue concerns the disallowance of depreciation claimed by the assessee. The Assessing Officer (AO) had reduced the cost of assets by the amount of excise duty refunds, treating them as deferred government grants, and consequently disallowed depreciation. The AO's rationale was based on section 43(1) of the Act, which defines 'actual cost' as the cost of assets reduced by any portion met directly or indirectly by any other person or authority.The CIT(A), however, deleted the disallowance, observing that the excise duty refund is a revenue receipt and not a capital subsidy. The CIT(A) relied on the judgment of the Supreme Court in the case of Commissioner of Income Tax vs. Meghalaya Steels Ltd. [2016] 383 ITR 217, which held that subsidies forming part of the Profit & Loss Account as revenue receipts should not be reduced from the cost of assets for depreciation purposes.The Tribunal upheld the CIT(A)’s decision, noting that the issue had already been decided in favor of the assessee in previous years (ITA No. 4990/Del/2014 for AY 2010-11 and ITA No. 823/Del/2015 for AY 2011-12). The Tribunal reiterated that the excise duty refund is a revenue receipt and should not reduce the actual cost of assets for depreciation calculations.2. Treatment of Excise Refund as Revenue Receipt:The AO had treated the excise duty refund as a capital receipt, reducing the cost of plant and machinery, thereby disallowing depreciation. The assessee argued that the excise duty refund is a revenue receipt, credited to the Profit & Loss Account, and should not be reduced from the cost of assets. The CIT(A) accepted this argument, referencing the Supreme Court’s ruling in Commissioner of Income Tax vs. Meghalaya Steels Ltd., which classified such subsidies as revenue receipts.The Tribunal, agreeing with the CIT(A), held that the excise duty refund is indeed a revenue receipt and should not be deducted from the cost of assets. This position was supported by the CBDT Circular No. 37/2016, which clarified that disallowances under sections 32, 40(a)(ia), 40A(3), 43B, etc., result in enhanced profits eligible for deduction under Chapter VI-A, thereby making the depreciation claim revenue-neutral.Conclusion:The Tribunal dismissed the Revenue’s appeals for both assessment years, affirming the CIT(A)’s decision that the excise duty refund is a revenue receipt. Consequently, the depreciation disallowance made by the AO was deleted, and the cost of assets was not reduced by the excise duty refund. The Tribunal’s decision was consistent with prior rulings in the assessee’s own case and supported by Supreme Court judgments and CBDT circulars.