Whether amount of subsidy received prior to insertion of Explanation 10 to sub-section (1) of section 43 is to be reduced from cost of assets - YES: HC

THE issue is - Whether the amount of subsidy received prior to insertion of Explanation 10 to sub-section (1) of section 43 can be reduced from the cost of assets. YES is the answer.

Facts of the case

A) The assessee is a public limited company engaged in the business of manufacturing of radiators, gaskets and compressed fiber jointing sheets (CFJS). The assessee had got a subsidy from the Commissioner of Industries for the investment made in building, plant and machinery and electrification in its industrial unit for production of compressed fiber jointing sheets. The subsidy was sanctioned on 17.8.1989 for investment in the capital assets but was received only in the year under consideration. The Assessing Officer was of the view that the subsidy having been given against investments in fixed capital assets, in view of the provisions of Explanation 10 to section 43(1), the proportionate cost of the assets is required to be reduced to that extent because this cost has been met by the State Government in the form of subsidy. CIT(A) dismissed assessee’s appeal. Tribunal confirmed the order passed by the Commissioner (A).

B) Assessing Officer noticed that the assessee had income from interest and miscellaneous income which was not taken into consideration for deduction as per Explanation (baa) to sub-section (4B) of section 80HHC. Assessing Officer found that the interest received was not incidental to the normal business activity of the assessee. Part of this interest was earned out of funds deposited with the bank and interest on bonds from Bank of Baroda. The assessee charged interest from its debtors for late payment of sale proceeds. Besides, a part represented interest received on refunds from the Income Tax Department. Assessing Officer held that interest income cannot be considered as income from business and that no netting is possible as the interest paid is for the purpose of business whereas the interest earned by the assessee on deposits with banks, excess payment of income tax etc. from income from other sources. He, accordingly, held that 90% of such interest is required to be reduced from the profits of business as per Explanation (baa) to sub-section (4B) of section 80HHC.

Having heard the parties, the Court held that,

A) ++ a plain reading of section 43(1), shows that, ordinarily, when any subsidy is received qua an asset, it would not be included in the actual cost of the asset to the assessee. In the present case, the assessee created total facility by constructing building and installing various machineries in 1993-94. Thus, the actual cost of the assets in respect of which subsidy has been granted, came to be determined at the relevant time. Thereafter, the assets entered the block of assets and lost their independent identity and the cost of such assets merged with the other assets in the block. At the time when the actual cost of the assets came to be computed under section 43(1), Explanation 10 was not on the statute book and therefore, the assessee was not required to reduce the amount of subsidy from the actual cost. Moreover, at that point of time, though the subsidy had been sanctioned, the same was not disbursed. The subsidy came to be actually given in the year under consideration; a long time after the actual cost of assets came to be determined under section 43(1). The costs of assets cannot be reduced out of the written down value of their respective blocks to the extent of Rs.25,00,000/- as the statute does not envisage any manner of doing so. When the Assessing Officer reduces the cost of assets out of the written down value of the block of assets, he is reducing not only the cost of assets in relation to which the subsidy is granted, but the cost of all assets forming part of the block, irrespective of whether any subsidy was granted in respect of such assets. Under the circumstances, when the statute does not contemplate computation of actual cost of asset after it becomes part of a block of assets, Explanation 10 to subsection (1) of section 43 cannot be made applicable to assets of which the actual cost has been determined much before the insertion thereof and which also form part of a block of assets. Therefore, when it is not possible to apply Explanation 10 of section 43(1) of the Act, in relation to an asset which has entered into the block much before the insertion thereof, it must be regarded as never having been intended by the legislature to apply to assets forming part of a block of assets which have entered the block much before the insertion of Explanation 10 to sub-section (1) of section 43 of the Act.

++ the date when the assessee had invested in fixed capital assets, Explanation 10 to sub-section (1) of section 43 was not on the statute book and hence, the actual cost came to be computed in terms of the law as existing at the relevant time. Nothing happened in the year under consideration so as to justify the action of reduction from the written down value of the block of assets. Explanation 10 to sub-section (1) of section 43 came into effect only from 1.4.1999 that too prospectively and, therefore, has no application, more so, when plant itself was set-up in assessment year 1993-94.

++ income Tax Appellate Tribunal was not right in law in holding that the amount of subsidy received prior to insertion of Explanation 10 to sub-section (1) of section 43 of the Act can still be reduced from the cost of assets.

B) ++ supreme Court in the case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax - 2012-TIOL-13-SC-IT-LB held that if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. Ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business.

++ the matter is restored to the file of the Assessing Officer to work out the deduction in the light of the decision of the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax.