AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (4) TMI 1081
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....tains to whether the sales tax subsidy should be treated as a capital or revenue receipt, and its subsequent impact on depreciation computation and Minimum Alternate Tax (MAT) liability under Section 115JB of the Income Tax Act, 1961 [hereinafter referred to as "the Act"]. 2.1. The Co-ordinate Bench had earlier adjudicated these appeals for Assessment Years 2003-04 to 2006-07 vide its order dated 21.12.2011. The appeals included: • ITA No. 1382/Ahd/2009 & ITA No. 1420/Ahd/2009 - Cross appeals for A.Y. 2003-04. • ITA No. 2007/Ahd/2007 - Appeal for A.Y. 2004-05. • ITA No. 1619/Ahd/2008 - Appeal for A.Y. 2005-06. • ITA No. 1383/Ahd/2009 - Appeal for A.Y. 2006-07. 2.2. During the first round of litigation, the Assessing Officer [hereinafter referred to as "AO"] treated the sales tax subsidy as a revenue receipt, making it taxable. The CIT(A) held it to be capital in nature, providing relief to the assessee. However, the Co-ordinate Bench while confirming the capital nature of the subsidy, held that the subsidy must be reduced from the cost of fixed assets, thereby reducing depreciation. Consequently, the issue was restored to th....
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....aw affirming the power of Tribunal to direct the Assessing Officer. Following are the relevant paras from the judgement of the Hon'ble High Court relating to second question of law - "7. Though ordinarily, it may be true that the subsidies, which are in the nature of capital receipts given for covering the capital details for acquisition of fixed assets such as plants, machineries, land and building etc., may go on to reduce the cost of acquisition of such assets and resultantly, may have an effect of reducing the depreciation available on the assets on such investment, nevertheless, this cannot be held to be a rule of universal application without examination of relevant facts. In this respect, we had noticed several decisions of this Court cited by counsel for the assessee and noted by us in earlier order dated 08.01.2013. 8. Though applicability of the proposition canvased by the Tribunal itself was open to argument on the basis of facts on record, in our opinion, the Tribunal committed an error in giving directions 1) without availing opportunity of hearing to the assessee and 2) without discussion of facts on record or law applicable to it. The relevant obser....
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....ofit u/s. 115JB of the Act. 2. The learned CIT(A) erred in fact and in law in holding that the amount of sales tax subsidy is required to be reduced from the cost of fixed asset and thereby depreciation is to be recalculated for the purpose of computing book profit u/s 115JB of the Act. 3. The learned CIT(A) erred in fact and in law in holding that the accounts of the Appellant have not been prepared in accordance with Part II and III of Companies Act, 1956. 4. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal. Revenue's appeal in ITA No.2007/Ahd/2007 for AY 2004-05 1) The Ld. CIT(A) has erred in law and on facts in deleting the amount of Rs. 62,38,589/- being subsidy given by State Government in the form of sales tax deferment being the amount added by Assessing Officer treating it as revenue receipt for the reason that subsidy was not for fixed assets but was to augment the normal business running of Binola Unit which had been established years back so question of setting up of new industrial unit does not arise as per finding of the AO. Revenue's appeal in IT....
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.... reduced from the actual cost of the asset for the purpose of depreciation. The proviso to Explanation 10 clarifies that even if the subsidy is not directly linked to a specific asset, it must still be proportionately allocated and deducted from the total asset cost. 4. The Authorised Representative (AR) of the assessee contended that the incentive received by the assessee in the form of sales tax deferment does not fall within the ambit of Explanation 10 to Section 43(1) of the Act. The AR submitted that Explanation 10 requires a direct or indirect nexus between the subsidy and the cost of acquisition of fixed assets for it to be reduced from the cost of such assets. However, in case of assessee, the sales tax deferment scheme does not provide any direct financial assistance for acquiring fixed assets. Instead, it is a mechanism introduced by the State Government for industrial development, wherein the assessee was required to collect sales tax, deposit it in a reserve account, and later pay 50% of the collected amount to the government while retaining the remaining 50% as a subsidy. 4.1. The AR emphasized that the incentive was granted post- commencement of production, mean....
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....how cause as to why the amount of capital subsidy should not be reduced from the cost of respective assets for the purpose of calculating depreciation. In reply dated 27.11.2006, it was submitted by the assessee before the AO that the amount of sales-tax incentives received by the assessee of Rs. 62,38,589/- was included in the schedule-2 of reserves and surplus and the amount was not subsidy for the fixed assets. It was submitted that the incentive is with reference to the sales made after the fixed assets were put to use and hence, this was not a case in which portion of cost of fixed assets was met by the Government and therefore, this amount was not required to be deducted from the cost of fixed assets. In view of this reply of the assessee, now it emerges that when the AO considered this receipt of subsidy as capital receipt and asked for reduction of the same from the cost of fixed assets for the purpose of calculating depreciation allowable to the assessee, it was the submission of the assessee before the AO that this incentive is with reference to sales made after the fixed assets were put to use and therefore, it was not a capital receipt meant for cost of fixed assets. Wh....
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....icals Ltd. (supra) and hence, we decide this issue in favour of the assessee. But at the same time, we direct the AO to consider the receipt as subsidy received by the assessee for fixed assets and therefore, the AO should recalculate the depreciation as per the law after reducing the amount of subsidy from the cost of fixed assets as per the provisions of section 43(1) of the Act. Before doing so, the AO should provide reasonable opportunity of being heard to the assessee and thereafter he should pass necessary order as per the law on these aspects." 5.1. The DR also pointed out the stand taken by the assessee in its grounds of appeal and also the submission of the assessee during the assessment and appellate proceedings which put forward the argument that the subsidy was granted as an incentive for sales rather than for purchasing fixed assets. The DR refuted this and stated that the subsidy was directly linked to fixed capital investment and that the manufacturing unit could not be set up without purchasing fixed assets and the quantum of subsidy was determined based on a prescribed percentage of fixed capital investment. The DR emphasized that the subsidy was calculated base....
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....lspun Steel Ltd. is ultimately based on the ratio laid down in P.J. Chemicals Ltd. and other pre-1999 cases, without analysing the impact of Explanation 10 to section 43(a) o. The AR further argued that Hon'ble Supreme Court's ruling in P.J. Chemicals Ltd. (1994) did not consider Explanation 10, therefore, any reliance on it without accounting for the statutory amendment is misplaced. 7.1. The DR placed reliance on Kinfra Export Promotion Industrial Parks Ltd. vs. Joint Commissioner of Income Tax (OSD), Kerala High Court (ITA No. 62 & 65/2018, judgment dated 07.04.2022), which explicitly held that the financial assistance received without reference to a specific purpose, still by application of proviso to Explanation 10 of section 43(1) of the Act, is apportioned and reduced from the cost of the assets of the assessee for the purpose of computation of depreciation. The DR highlighted that before the Hon'ble Kerala High Court, the Senior Advocate representing the assessee had specifically relied on the Welspun ruling, but the High Court rejected its applicability, emphasizing that financial assistance received without reference to a specific purpose must still be apportioned and ....
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....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 directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee." 10.1. Explanation 10 to section 43(1) of the Act introduced w.e.f. 01.04.1999, mandates that if a portion of the cost of an asset is met, directly or indirectly, by the Government in the form of a subsidy, grant, or reimbursement, such portion must be deducted from the actual cost of the asset for the purpose o....
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....fect from 01.04.1999. Explanation 10 is a statutory amendment that overrides any earlier judicial interpretation rendered without considering its scope and effect. It explicitly provides that any subsidy or grant, whether received directly or indirectly, and even if not linked to a specific asset, must be reduced from the cost of the asset. Accordingly, reliance on pre-1999 case law, without appreciating the overriding effect of Explanation 10, is misplaced. Therefore, we are of the view that the assessee's contention does not withstand the test of law post-insertion of the said Explanation. 10.5. We find that the sales tax incentive availed by the assessee, as noted in Part-II of Schedule-16 of the Notes on Accounts, was fundamentally linked to its fixed capital investment. The eligibility for this incentive was contingent upon the investment in fixed assets, as the scheme itself was framed to support industrial development. While the quantum of subsidy was ultimately determined based on post-commencement sales, the nature of the incentive remained a capital subsidy, as it was later converted into a capital reserve. Furthermore, as explicitly stated in the financial statements,....
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.... assets were put to use and not meant for asset acquisition. However, once it was accepted that the subsidy was in reference to fixed assets and was a capital receipt, the natural consequence under the law was that it must be reduced from the cost of fixed assets for the purpose of calculating depreciation. The Co-ordinate Bench in that case had also directed the AO to recalculate depreciation after reducing the amount of subsidy from the cost of fixed assets, in accordance with Section 43(1). This earlier decision of the Co-ordinate Bench reaffirms the principle that once a subsidy is categorised as capital in nature, its treatment must align with Explanation 10, mandating a proportionate deduction from the cost of fixed assets. 10.9. In its grounds of appeal, the Revenue has contended that the CIT(A) erred in holding that the sales tax subsidy is capital in nature and should be deducted from the cost of fixed assets. However, we find no merit in this ground, as the capital nature of the subsidy is undisputed, and once classified as such, its reduction from the cost of fixed assets follows as a natural consequence under Explanation 10 to section 43(1) of the Act. 10.10. In v....
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.... the net profit, the AO was directed to recompute depreciation and then revise the book profit accordingly. 12. Aggrieved by the decision, the assessee has preferred the present appeal before us, challenging the CIT(A)'s finding. 13. During the course of hearing before us, the AR submitted that the appellant had received sales tax subsidy for its Binola Unit, Haryana, under the Sales Tax Deferment Scheme granted by the State of Punjab & Haryana. The assessee had treated the sales tax subsidy as a capital receipt and credited the same to the Capital Reserve Account in its books of accounts. 13.1. The AR further submitted that since book profits are computed as per the Companies Act, 1956, the treatment given by the assessee was correct. The AR emphasized that the Co-ordinate Bench had already decided that the sales tax subsidy is a capital receipt and, therefore, should not be included in the book profit. The AO's action of adding it back was incorrect as per Supreme Court ruling in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC), which held that the AO has no power to alter the book profits unless the accounts are not prepared as per the Companies Act. 13.2. The AR sub....
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....( as per Clause (b) of the explanation). The DR contended that the assessee did not route the sales tax collected through the profit and loss account but directly credited it to the "Sales Tax Capital Reserve." This was despite the fact that there was no change in the accounting method employed by the assessee in preceding years, as per Form No. 3CD, Column No. 11(6). 14. The DR further argued that the sales tax so collected but not remitted assumes the character of income, and the act of creating a Sales Tax Subsidy effectively results in the amount being carried to a reserve by debiting an equivalent amount of unpaid sales tax. It was submitted that this action of the assessee falls within the purview of Clause (b) of the Explanation to Section 115JB of the Act and, therefore, the addition made by the AO was justified. 14.1. The DR also referred to the assessee's submission before the Ld. CIT(A) regarding the unpaid sales tax constituting a subsidy and contended that the said amount ought to have been added to the book profit under Clause (c) of the Explanation to Section 115JB of the Act. The DR pointed out that in Para 13 of the Ld. CIT(A)'s order dated 11.12.2012, the fo....
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....round that the subsidy impacts depreciation and thus affects net profit. 15.2. The DR contended that the assessee, by crediting the subsidy directly to the Sales Tax Capital Reserve instead of routing it through the Profit & Loss Account, effectively carried an amount to a reserve, and as per Clause (b) of Explanation 1 to Section 115JB of the Act, such an adjustment is justified. The DR further submitted that even if the subsidy is a capital receipt, the creation of a reserve effectively increases book profits, as per the deeming provisions of Section 115JB of the Act. We have also duly considered the contention of the DR that the assessee, by not routing the sales tax subsidy through the Profit & Loss Account, adopted a treatment inconsistent with the income approach prescribed under Accounting Standard (AS)-12 - Accounting for Government Grants. The DR argued that the subsidy ought to have been recognized as income, and its direct credit to the Sales Tax Capital Reserve amounted to an impermissible deviation from the standard accounting treatment, thereby justifying its addition while computing book profit under Section 115JB of the Act. However, we find this contention witho....
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....nt referred to in clause (j) is not credited to the statement of profit and loss, then such amount shall be added or reduced, as the case may be." Since the sales tax subsidy was directly credited to the capital reserve and was never debited to the Profit & Loss Account, the AO was not justified in making an addition to book profit under Section 115JB. The AO's adjustment in this regard is not justified, and we allow the first ground in favor of the assessee. 17. We have discussed and decided in the earlier part of this order while dealing with the Revenue's appeal that once it has been accepted that the subsidy pertains to fixed assets and is capital in nature, the natural consequence under Explanation 10 to Section 43(1) is that it must be reduced from the cost of fixed assets for the purpose of calculating depreciation. In light of the findings and decision, Ground No. 2 of the assessee's appeal is dismissed. 17.1. The CIT(A) has observed that the accounts of the assessee were not prepared in accordance with Part II & III of Schedule VI of the Companies Act, 1956 because the subsidy was not appropriately accounted for in book profits. The AO, based on this observation, sou....