|CORAM:||Ashwani Taneja (AM), Sanjay Garg (JM)|
|SECTION(S):||41(1), 43(1), 50|
|CATCH WORDS:||cessation, Depreciation, reimbursement of actual cost, remission, subsidy|
|COUNSEL:||Dr. K. Shivram|
|DATE:||November 26, 2015 (Date of pronouncement)|
|DATE:||January 29, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Subsidy granted to set up a wind project is a capital receipt. the subsidy cannot be reduced under Explanation 10 to s. 43(1) from the cost of the assets acquired though 100% depreciation is allowed on the cost of the assets. The subsidy is also not assessable either u/s 41(1) or u/s 50|
The assessee installed wind energy project at a cost of Rs.1189.87 lakhs. As per the policy of Maharashtra Government, to promote generation of energy through non conventional sources to supplement the ever increasing demand of the electricity in the state, the wind power projects have been granted status of small scale industries and the state government gives the capital subsidy up to 30% of the fixed capital investment to the promoters subject to a condition that wind power plant has successfully operated with a minimum 12% plant load factor for at least one year. The assessee accordingly applied for the said capital subsidy which was granted to the assessee during the relevant financial year 2007-08 at Rs.20 lakh. During the subsequent year i.e. F.Y. 2008-09, assessee had to refund back subsidy to the extent of Rs.10 lakhs. The AO observed that the assessee had already claimed 100% depreciation on the windmill, and as such the subsidy was required to be reduced from the cost of asset and hence the assessee had received a benefit of Rs.10 lakh. He accordingly added the said sum into the income of the assessee. The AO further observed that even otherwise the written Down Value (WDV) of the asset was nil, hence subsidy was to be taxed as short term capital gains under section 50 of the Act. In appeal, the CIT(A) held that as 100% depreciation was allowed to the assessee on the asset itself, hence the receipt of subsidy was a benefit received and was hence taxable under section 41(1)of the Act. On further appeal to the Tribunal HELD allowing the appeal:
(i) In CIT vs. Reliance Industries Ltd (2011) 339 ITR 632 (Bom) the Bombay High Court, while relying upon the decision of the Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd (2008) 306 ITR 392 (SC), has held that if the object of the subsidy was to set up a new unit in a backward area to generate employment therein, then the subsidy was to be treated on capital account and the sales tax incentive was to be treated as capital receipt. Admittedly, in the case in hand, the capital subsidy has been granted as an incentive to promote and encourage the installation of wind mill for generation of electricity. The said subsidy being provided to the assessee to encourage the setting up of wind mill to promote generation of energy through non conventional sources, thus, is to be treated as capital receipt.
(ii) So far as the applicability of the section 41(1) is concerned, it relates to the benefit derived by an assessee in respect of loss, expenditure or trading liability and not in respect of capital receipts. So far as the ‘Explanation 10’ to ‘Section 43(1)’ is concerned, we find that as per the policy of the government, the subsidy is not given automatically on the acquisition of asset or for the purpose of acquisition of asset. The precondition is that the assessee must install a wind power project and that the wind power plant must be successfully operated with a minimum 12% plant load factor for at least one year. Admittedly, the assessee had installed the project in the financial year i.e. 2001-02. The assessee after successfully operating the plant with a minimum 12% plant load factor for one year had applied for capital subsidy vide letter dated 31.03.03, which subject to fulfillment of certain conditions were ultimately released to the applicant during the financial year i.e. 2007-08 at Rs.20 lakhs. However, out of the said amount of Rs.20 lakh, Rs.10 lakh had to be returned back by the assessee to the government. So the mere acquisition of the asset was not sufficient to claim subsidy. The subsidy was not given for the purpose of acquisition of the asset but on the production of power generation as an incentive to promote through non conventional sources. Hence, the grant of subsidy in this case is of such a nature that it cannot be directly relatable to the asset acquired. The activity i.e. production of energy by operating the plant in accordance with the specified standards is the pre-requisite condition. The subsidy was not granted to the assessee on the acquisition of asset which was acquired in the financial year i.e. 2001-02 but only in the financial year i.e. 2007-08 on achieving more than 12% plant load factor. It is also pertinent to mention here that the assessee had to pay back half of the amount of subsidy because of non fulfillment of certain conditions. Under such circumstances the proviso to explanation 10 to section 43(1), is applicable to the case in hand. The co-ordinate Kolkata bench of the Tribunal in the case of “DCIT vs. Rasoi Ltd.” (2014) 46 taxman.com 214 (Kolkata-Trib.), while relying upon the decision of the Hon’ble Supreme Court in the case of “CIT vs. P.J. Chemicals Ltd.” (1994) 210 ITR 830/76 taxman 611, has held that for computation of deprecation, no part of government subsidy for encouragement for setting up of industrial projects could be deducted from actual cost of WDV of fixed assets, if same is not relatable to acquisition of assets.
(iii) So far as the contention of the AO that the subsidy is liable to be taxed under section 50 of the Act is concerned, we find that in this case neither there was a transfer of any asset from the block nor did the block has ceased to exist. It is not a case of capital gains by way of transfer but it is only a case of capital receipt as observed above as an incentive by the state government to promote the generation of electricity through non conventional sources.
(iv) In view of the above, in our view, the subsidy received by the assessee is not taxable under section 41(1) neither under section 43(1) and nor under section 50 of the Act.