2025 (10) TMI 1143 - AT - Income Tax

Revision under Section 263 upholds adjustment: grants for depreciable assets must reduce asset value or be taxed as income

ITAT Ahmedabad upheld the Principal CIT's revision under section 263, finding the assessment erroneous and prejudicial because the AO failed to determine ... Revision u/s 263 - assessee received Government grants during the relevant period which were credited to a deferred Government account instead of being reduced from the cost or written down value of the relevant block of assets; only a small portion of the grants was amortised to profit and loss and offered as income while depreciation was claimed on the full asset value, leading to an excess claim of depreciation - as per CIT AO had not made the necessary enquiries or recorded any finding on whether the grants should have been added to income or should have reduced the asset cost, and therefore the AO had not applied his mind to this issu - HELD THAT:- Principal Commissioner has specifically recorded three aspects: firstly, that pursuant to the Finance Act, 2015, the definition of “income” in section 2(24) was amended, and Explanation 10 to section 43(1) along with ICDS-VII mandated that Government grants relatable to depreciable assets must either be reduced from actual cost/WDV of the assets or else be taxed as income. It was found that the assessee had an opening deferred grant balance of Rs. 105.46 crore, received a further Rs. 7.59 crore during the year, but amortised only Rs. 3.87 crore while continuing to claim depreciation on the unreduced WDV of the block. This resulted in an effective excess claim of depreciation on the balance grant. Secondly, the rebuttal offered by the assessee was that the assets were acquired in FY 2016-17 and once they entered the block of assets, the WDV could not be reduced in subsequent years under section 43(6)(c). We are unable to accept this contention, since the Principal Commissioner has correctly observed that tax depreciation is governed by the Act and not by accounting treatment, and that the statutory scheme read with ICDS-VII required an adjustment in the relevant year. We find merit in the conclusion of the Principal Commissioner that the Assessing Officer’s omission to examine and decide this issue rendered the assessment order both erroneous and prejudicial to the interests of the Revenue. The reliance placed by the assessee on consistency of accounting treatment or on past acceptance of the same by the Department cannot override the statutory mandate, as held by the Hon’ble Supreme Court in CIT v. British Paints India Ltd. [1990 (12) TMI 2 - SUPREME COURT] The plea that the matter stands concluded by treatment in earlier years is contrary to the law laid down in Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. [2007 (9) TMI 399 - SUPREME COURT] and Meeraj Estate & Developers [2019 (10) TMI 1002 - ALLAHABAD HIGH COURT] - In these circumstances, we are of the considered view that the case of the assessee is squarely covered by the decision in M/s. S.P. Chips Potato Pvt. Ltd. [2022 (7) TMI 994 - ITAT AHMEDABAD] Further, from the material placed on record, we observe that the assessee had not made any specific query on this aspect during the course of assessment proceedings as well. Accordingly, we find no infirmity in the order of Ld. Pr. CIT so as to call for any interference. Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether an order under section 263 of the Income-tax Act is valid where the Assessing Officer accepted returned income without enquiring into the tax treatment of government grants credited to a deferred account, resulting in possible excess depreciation claim because the block WDV was not reduced or the grant added to income. 2. Whether past accounting treatment and prior administrative acceptance of a method of amortising government grants preclude revisional jurisdiction under section 263 in a subsequent assessment year. 3. Whether a government grant received in an earlier year (when assets were acquired and entered a block) can be adjusted in a later assessment year by reducing the WDV of the block or by adding the grant to income in that later year for tax purposes, in light of Explanation 10 to section 43(1), section 2(24) (as amended), and ICDS-VII. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 263 where AO did not examine tax treatment of government grants and allowed depreciation on unreduced WDV Legal framework: Section 263 permits revisional action where the Assessing Officer's order is erroneous and prejudicial to the interests of the Revenue. Explanation 10 to section 43(1), amendment to section 2(24) (post Finance Act, 2015) and ICDS-VII require that government grants relating to depreciable assets either be reduced from the actual cost/WDV of the asset or be added to income for tax computation. Precedent treatment: The Tribunal applied its prior decision where revisional jurisdiction was sustained where the AO failed to make specific enquiries leading to an incorrect allowance (M/s. S.P. Chips Potato Pvt. Ltd.). The Court relied on the principle that each assessment year is independent (Municipal Corporation of City of Thane v. Vidyut Metallics Ltd.) and that accounting practice does not override tax computation obligations (CIT v. British Paints India Ltd.). Earlier decisions accepting inconsistent accounting treatments do not bind future assessments (Meeraj Estate & Developers). Interpretation and reasoning: The Tribunal found that the AO accepted returned income without addressing whether grants credited to a deferred account should have reduced asset cost/WDV or been added to income. Material facts showed an opening deferred grant balance and fresh receipts where only a small portion was amortised while full depreciation continued to be claimed on unreduced WDV, causing an effective excess depreciation claim. The Tribunal held that the AO did not apply his mind or make necessary enquiries; this omission amounted to an erroneous order prejudicial to Revenue because required statutory adjustments (either addition to income or WDV reduction and consequent re-computation of depreciation) were not made. Ratio vs. Obiter: Ratio - Where statutory provisions and accounting standards (Explanation 10 to s.43(1), s.2(24) amendment, ICDS-VII) impose a specific tax treatment for government grants related to depreciable assets, failure by the AO to examine and decide that treatment may render an assessment order erroneous and prejudicial to Revenue, thereby justifying revision under s.263. Obiter - Factual observations on percentages of amortisation and specific numeric reconciliations are ancillary to the legal ratio. Conclusion: The revisional order under section 263 was valid because the AO omitted to examine and apply the statutory tax treatment for government grants, resulting in an erroneous and prejudicial assessment. Issue 2 - Effect of past accounting treatment and prior acceptance on revisional jurisdiction under section 263 Legal framework: Section 263's twin tests (erroneousness and prejudice) are to be applied afresh for each assessment year; accounting policies under the Companies Act and prior administrative acceptance do not displace the statutory requirement to compute taxable income correctly under the Income-tax Act. Precedent treatment: The Tribunal followed authority that prior incorrect allowances or past administrative acceptance do not estop the Revenue from re-examining tax computation in a subsequent year (Municipal Corporation of City of Thane; Meeraj Estate; British Paints). The Tribunal relied on its own earlier decision applying similar principles. Interpretation and reasoning: The Tribunal rejected the contention that consistency of accounting treatment or past acceptance bars revision. It emphasized the independence of assessment years and the AO's duty to ensure correct tax computation irrespective of regular accounting practices. Where statutory provisions require a tax adjustment, past acceptance does not negate the AO's obligation to make enquiries and record findings. Ratio vs. Obiter: Ratio - Consistent accounting treatment or past departmental acceptance does not preclude revisional action under s.263 when the AO's order is shown to be erroneous and prejudicial to Revenue for the year under consideration. Obiter - The Tribunal's comment that other judicial precedents cited by the assessee were fact-specific and inapplicable to the present facts. Conclusion: Prior acceptance and accounting consistency do not prevent exercise of revisional jurisdiction where the AO failed to address statutory tax adjustments required by law. Issue 3 - Temporal point for adjusting government grant against cost/WDV of block assets: whether adjustment can be made in a later year after asset has become part of a block Legal framework: Explanation 10 to section 43(1) and ICDS-VII govern the tax treatment of government grants related to depreciable assets; section 43(6)(c) deals with adjustments to block WDV for additions and disposals during the year. The statutory scheme distinguishes accounting depreciation and tax depreciation and mandates tax adjustments irrespective of Companies Act accounting treatment. Precedent treatment: Authorities cited by the Tribunal establish that tax law may require adjustments in accordance with statutory provisions and accounting standards applicable for tax computation; earlier tax treatment in the year of acquisition does not preclude revisiting the tax effect where statutory provisions apply. Interpretation and reasoning: The Tribunal rejected the assessee's argument that grants received when assets were acquired must be adjusted only in that acquisition year and cannot be adjusted against the WDV of the block in subsequent years. It held that the statutory mandate (Explanation 10, s.2(24) amendment, ICDS-VII) requires the grant either to be added to income or to reduce the cost/WDV for tax purposes, and the Assessing Officer must determine and apply the correct method in the relevant assessment year. The Tribunal observed that treating the issue as concluded in earlier years improperly elevates accounting practice above statutory tax computation rules. Ratio vs. Obiter: Ratio - Government grants relatable to depreciable assets may necessitate adjustment in the year under consideration either by inclusion in income or by reducing asset cost/WDV for tax purposes under the statutory scheme; the AO must examine and apply the correct adjustment even if the asset forms part of a block. Obiter - Detailed mechanistic adjustments and reconciliation procedures directed to the AO are procedural guidance rather than binding ratio. Conclusion: Adjustment of government grants for tax purposes is governed by Explanation 10 to s.43(1), s.2(24) amendment and ICDS-VII and may require action in the subsequent assessment year where the AO has failed to apply those provisions; the AO must determine whether to add the grant to income or reduce WDV and recompute depreciation. Cross-References and Final Determination Cross-reference: Issues 1-3 are interlinked - the failure to examine statutory treatment of grants (Issue 1) cannot be cured by reliance on past acceptance (Issue 2) and turns on the statutory scheme governing timing and manner of adjustment of grants against asset cost/WDV (Issue 3). Final conclusion: The revisional order under section 263 was held legally valid and sustainable because the Assessing Officer failed to apply statutory provisions (Explanation 10 to s.43(1), s.2(24) amendment, ICDS-VII) or make necessary enquiries about treatment of government grants, rendering the assessment order both erroneous and prejudicial to the interests of the Revenue; past accounting treatment and prior acceptance did not preclude revisional action.