TaxTMI 
TaxTMI 
2016 (1) TMI 783
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....he subsidy in question received by the Assessee under the Scheme was revenue in nature and was therefore taxable. Over and above that the AO also reduced the value of subsidy from the "actual cost" of the machinery on which depreciation has to be allowed. Under Explna-10 to Sec.43(1) of the Act, which defines "Actual Cost" for the purpose of allowing depreciation, subsidy received from the Government or any other person, to meet the cost acquisition of asset on which depreciation is claimed should be reduced from the actual cost of the said asset for the purpose of allowing depreciation. The said Explanation-10 reads thus: "Explanation 10 - Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee:- Provided - that where such subsidy or grant or reimbursement is of such nature that it cannot be ....
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..... He next pointed out that the AO reduced Rs. 3,48,976 which is 15% of Rs. 23,26,506 from the depreciation that has to be allowed to the Assessee under the Income Tax Act,1961 (Act) in accordance with Expln.10 to Sec.43(1) of the Act. According to him, once the AO comes to the conclusion that the subsidy received was utilized for acquiring depreciable asset than the inevitable conclusion is that the subsidy in question is capital subsidy and therefore the same cannot be brought to tax. According to him the subsidy in question is to facilitate the tea factories to upgrade/replace/renovate the old and worn out machinery by purchasing new machines in order to manufacture quality tea and therefore the subsidy in question has to be regarded as capital receipt not chargeable to tax. He drew our attention to the Scheme under which subsidy was granted to highlight the purpose of the scheme. He placed reliance on the following decisions: (i) The Hon'ble Supreme in CIT , Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008] 174 Taxman 87 (SC) wherein it was that, `It is the object for which subsidy/assistance is given, that truly determines nature of sub....
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....ction 2(24) of the Income Tax Act, 1961 providing an inclusive definition of the expression `Income'. The relevant portion of Sub-Clause (xviii) is produced below:- `2(24)(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any other authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43. 11. The aforesaid amendment is prospective and applicable w.e.f. 1-4-2016. According to him prior to the aforesaid amendment, if a subsidy was regarded as revenue subsidy and was given for the purpose of meeting the cost of acquiring fixed assets than the Assessee will suffer the burden of having to pay tax on the subsidy and further the cost of fixed assets will also be reduced by virtue of Explanation 10 to Sec.43(1) of the Act. According to him one of the purpose of the aforesaid amendment was to ensure that the Assessee does not suff....
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....capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 15. It would also be of immense merit to refer to another judgement of the Hon'ble Calcutta High Court in the case titled Commissioner of Income Tax vs. Rasoi Limited [2011] 335 ITR 438, wherein it has been held by the Hon'ble Court by making a due reference to the judgement of the Hon'ble Apex Court in the case titled Commissioner of Income Tax vs. Ponni Sugars & Chemicals Ltd [2008] 174 Taxman 87 (SC) that one time subsidy received as a percentage of sales tax paid for modernization and expansion purposes would constitute a capital receipt not subject to the rigours of tax under the Income Tax Act, 1961. The Hon'ble Calcutta High Court further held that merely because subsidy received was equivalent to a substantial percentage of the sales tax paid, it cannot be construed that the same was in form of refund of sales tax paid and exigible to tax. Hence one time subsidy received from the State Government under the scheme of industrial promotion for expansion of its facili....
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....ement programmes such HAACP and ISO certification, it is proposed to provide incentives to the tea factories and packaging units opting for participation in certification programmes. Keeping the above objectives in view, this scheme has been formulated. In order to provide an impetus to take up quality upgradation works in the right earnest, the Board through this scheme proposes to extend financial assistance by way of subsidy @ 25% of the actual cost. Tea Board's role being that of a catalyst towards accelerating the production growth rate, the funds provided under this scheme are not meant to meet the entire needs of the industry. 75% of the total funds required for undertaking the developmental activities have to be mobilized by the industry itself either from its internal generation or by borrowings from financial institutions/commercial banks. Eligibility: All the tea growers, manufacturers and others who are dealing with value addition of tea such as blending, packeting, tea bagging etc, and are registered with Tea Board are eligible to claim subsidy subject to fulfilment of the terms and conditions of the scheme. The subsidy, however, shall not be allowed for any equipment....
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....he assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43. 19. The aforesaid amendment is prospective and applicable w.e.f. 1-4-2016. Explanatory Notes to Provisions of Finance Act, 2015 reads thus: "5. Alignment of provisions relating to taxation of Government Grants with the provisions of Income Computation and Disclosure Standards (ICDS). 5.1 Sub-section (2) of section 145 of the Income-tax Act provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. The Central Board of Direct Taxes (CBDT) notified ICDS-I to ICDS-X vide Notification No.S.O. 892(E) dated 31st March, 2015 after wide public consultations. The ICDS-VII relating to Government grants provides that all Government grants except relating to depreciable asset shall be recognised as income in accordance with the provisions of the said ICDS. The existing provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act already contained the guidanc....
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....to Section 2(24) provides that assistance in the form of a subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement (by whatever name called) by the central government or a state government or any authority or body or agency in cash or kind to an assessee (other than one considered under Explanation 10 to Section 43(1)) would be included in the total income of the assessee. Thus, any subsidy/grant/reimbursement, which is taken into account and reduced from the actual cost of depreciable assets while determining the same under Section 43(1) shall not be treated as income. 21. The question is as to whether the aforesaid amendment to Sec.2(24)(xviii) of the Act, can be considered as having retrospective operation. The aforesaid amendment is in two parts. The first part says that any subsidy whether it is capital or revenue will be regarded as "income". The second part is that, if the value of the subsidy is reduced from the value of actual cost u/s.43(1) of the Act for allowing depreciation, than the subsidy will not be taxed as "income". If, we were to hold that the amendment is retrospective than the 1st part of the amendment by which any subsidy, whethe....