DCIT, Mandi Gobindgarh V. SMT Machine (India) Ltd., Mandi Gobindgarh

ITA 1092/CHANDI/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51426 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 19-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: RAJIV DATTA
• Keywords: Depreciation; Proportionate interest; Capital receipt; Commercial expediency
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A: CHANDIGARH. BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER. I.T.A. NO.1092(CHD)/2010. (ASSESSMENT YEAR: 2007-08) THE DEPUTY C.I.T., M/S.SMT MACHINE (INDIA) LTD., CIRCLE, MANDI GOBINDGARH. MANDI GOBINDGARH. (APPELLANT) VS. (RESPONDENT) AND C.O. NO.41(CHD)/2010. (ARISING OUT OF ITA NO.1092(CHD)/2010) (ASSESSMENT YEAR: 2007-08). M/S.SMT MACHINE (INDIA) LTD., THE DEPUTY C.I.T., MANDI GOBINDGARH. CIRCLE, MANDI GOBINDGARH. (CROSS OBJECTOR) VS. (RESPONDENT) ASSESSEE BY: SHRI RAJIV DATTA. DEPARTMENT BY: SHRI N.K. SAINI, D.R. DATE OF HEARING: 3 RD AUGUST, 2011. DATE OF PRONOUNCEMENT: 24 AUGUST, 2011. ORDER PER MEHAR SINGH, A.M. THE DEPARTMENT FILED THE PRESENT APPEAL AND THE AS SESSEE ALSO FILED CROSS OBJECTION AGAINST THE ORDER OF THE CIT(A), P ATIALA, DATED 24-6-2010, PASSED U/S.250(6) OF THE INCOME TAX ACT, 1961 (IN S HORT THE ACT), 2 RELATING TO THE ASSESSMENT YEAR 2007-08. AS BOTH THESE CASES WERE HEARD TOGETHER, THE SAME ARE BEING DISPOSED OF BY A CONSO LIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. ITA NO.1092(CHD)/2010 ASSESSMENT YEAR 2007-08:- THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.11,35,091/- OUT OF THE TOTAL ADDITION OF RS.20,18,639/-, MADE BY THE AO ON A/C O F DISALLOWANCE OF PROPORTIONATE INTEREST ON ADVANCES, OF WHICH NO BUSINESS EXPEDIENCY COULD BE PROVED BY THE ASSESSEE . 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN PLACING RELIANCE UPON THE HONBLE JURISDICTIONAL TRIBUNALS ORDER PASSED IN THE CASE OF GOPAL TIMBERS VS. ITO, 51 TTJ 393 (ITA NO.507/CHD/1986, CHANDIGARH BENCH) EVEN WH EN THE FACTS OF THE CASE RELIED UPON HAVE NO RELEVANCE TO THE CASE AT HAND. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN NOT ADJUDICATING UPON THE TOTAL DISALLOWANCE OF RS.31,12,024/-, AS WORKED OUT BY THE AO, AND RESTRI CTING HIS DECISION TO THE ADDITION OF RS.20,18,639/- ONLY. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN OBSERVING THAT NO DISALLOWANCE OF INTEREST ON AD VANCES FOR THE PURCHASE OF LAND COULD BE MADE WHERE LAND HAD B EEN PURCHASED IN THE FOLLOWING YEAR, WITHOUT APPRECIATI NG THAT PURCHASE OF LAND CANNOT BE CONSIDERED AS A BUSINESS PURPOSE OF THE ASSESSEE. 5. IT IS PRAYED THAT THE ORDER OF THE CIT(A) BE SE T ASIDE AND THAT OF THE AO RESTORED. 6. THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY G ROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD AND DISPOSED OF. 3 3. C.O. NO.41(CHD)/2010 (ARISING OUT OF ITA NO.1092 (CHD)/2010 ASSESSMENT YEAR 2007-08: IN ITS CROSS OBJECTION, THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS:- 1. THAT THE ORDER OF THE LD. CIT(A) IS AGAINST THE FACTS OF THE CASE AND IS BAD IN LAW. 2. THAT ON THE FACTS & CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.983548/- OUT OF ADDITION OF RS.20,18,639/- MADE BY THE AO ON ACCOUN T OF DISALLOWANCE OF INTEREST. 3. THAT ON THE FACTS & CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) HAS ERRED IN HOLDING THAT THE SUBSIDY RELATING TO Y EAR 1995-96 IS LIABLE TO BE REDUCED FROM THE W.D.V. OF FIXED ASSET S AND ACCORDINGLY ERRED IN CONFIRMING THE ADDITION OF RS. 368226/- OUT OF DEPRECIATION. 4. THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR DELETE ANY OF THE GROUNDS OF APPEAL BEFORE THE SAME IS FINALLY HE ARD & DISPOSED OFF. I.T.A. NO.1092(CHD)/2010:- 4. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE FILED ITS RETURN DECLARING AN INCOME OF RS.3,52,51,930/-, ON 26-10-2007, AND THE SAME WAS PROCESSED U/S.143(1), OF THE ACT, ON 11-3-2009. NOTICE U/S. 143(2) OF THE ACT WAS ISSUED, ON 8-9-2008. THE BOOKS OF ACCOUNT HAVE BE EN DULY AUDITED U/S.44AB OF THE ACT. DURING THE COURSE OF ASSESSME NT PROCEEDINGS, IT WAS FOUND THAT THE ASSESSEE HAD MADE PAYMENT OF INTERES T OF RS.20,18,639/-, ON LOANS RAISED BY IT, FROM DIFFERENT PERSONS @ RANGIN G FROM 12% TO 18%. ON THE OTHER HAND, THE ASSESSEE HAD ADVANCED CERTAIN L OANS TO DIFFERENT PERSONS, ON WHICH, NO INTEREST HAD BEEN CHARGED BY IT. THE ASSESSEE WAS REQUIRED TO JUSTIFY THAT THE LOANS ADVANCED BY IT WERE FOR BUSI NESS PURPOSES, OUT OF COMMERCIAL EXPEDIENCY. IT IS SEEN THAT THE ASSESSE E FAILED TO DISCHARGE THE 4 ONUS AS IT FAILED TO PROVE THAT ADVANCES, IN QUESTI ON, WERE GIVEN OUT OF COMMERCIAL EXPEDIENCY AND FOR BUSINESS PURPOSES. T HE ASSESSEE GAVE DETAILS OF 27 PERSONS TO WHOM ADVANCES HAD BEEN GIV EN. EXAMINATION OF ASSESSEES BOOKS OF ACCOUNT REVEALED THAT WHILE ASS ESSEES REPLY WAS CORRECT IN SOME CASES, HOWEVER, IN A NUMBER OF CASES THERE WERE OUTRIGHT ADVANCES WERE RETURNED AS SUCH BY THE PERSONS TO WHOM THE SA ME WERE GIVEN OUT OF COMMERCIAL EXPEDIENCY OR FOR BUSINESS PURPOSES. TH E TOTAL INTEREST DISALLOWABLE WORKS OUT TO RS.31,23,024/-. HOWEVER, THE A.O. RESTRICTED THE DISALLOWANCE OF INTEREST TO RS.20,18,639/-, OUT OF THE TOTAL INTEREST. THE A.O., THEREFORE, ADDED A SUM OF RS.20,18,639/-, TO THE TOTAL TAXABLE INCOME OF THE ASSESSEE. 4.1 THE A.O. ALSO ADDED A SUM OF RS.3,68,226/-, TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF DEPRECIATION DISALLOWABL E @ 10% OF RS.10,04,256 AND 15% OF RS.17,85,344/-, BY REDUCING THE SUBSIDY RECEIVED BY ASSESSEE DURING THE RELEVANT ASSTT. YEAR UNDER R EFERENCE, FROM THE COST OF THE ASSETS. 5. THE CIT(A), HAS DISCUSSED THE ISSUE OF DEPRECIA TION IN PARA 4 OF HIS ORDER. THE RELEVANT AND OPERATIVE PART OF THE CIT( A)S ORDER IS REPRODUCED HEREUNDER FOR THE PROPER APPRECIATION:- 4. THE GROUND NOS.3 AND 4 OF APPEAL CONTESTS THAT HE LD. ADDL. CIT HAS ERRED IN DISALLOWING THE DEPRECIATION ON THE CA PITAL SUBSIDY RECEIVED FROM THE STATE GOVT. SANCTIONED IN 1996 BU T RECEIVED DURING THE YEAR UNDER APPEAL. 4.1 THE FACTS ARE THAT THE ASSESSEE RECEIVED RS.27,89,6 00/- AS SUBSIDY IN RESPECT OF ITS UNIT. THE SAID SUBSIDY W AS SANCTIONED IN 1996. THE ASSESSEES CONTENTION THAT THE SUBSIDY I S A CAPITAL RECEIPT AND IS NOT TAXABLE AS IT PERTAINS TO PERIOD WHEN TH E UNIT WAS SET UP IN 1992 AND WAS SANCTIONED IN THE YEAR 1996. THE ASSE SSEE CONTENDED THAT THE AMENDMENT MADE IN 1999 BY INSERTING EXPLAN ATION 10 TO 5 SECTION 43(1) IS APPLICABLE FROM 1-4-1999 AND THE S AME CANNOT BE APPLIED FOR THE ASSETS PURCHASED PRIOR TO 31-3-1999 . THE SUBSIDY WAS RECEIVED DURING THE YEAR ONLY THROUGH IT WAS DUE AS PER SANCTION IN 1996. IN SUPPORT OF HIS CONTENTION, THE ASSESSEE H AS RELIED ON THE HONBLE SUPREME COURT DECISION IN CIT VS. P.J. CHEM ICALS LTD. 1210 ITR 830. 4.2 THE A.O. REJECTED THE CONTENTION OF THE ASSESSE E AND HELD THAT EXPLANATION 10 TO SECTION 43(1) IS APPLICABLE AND T HE AMOUNT OF SUBSIDY RECEIVED HAS TO BE REDUCED FROM THE COST OF THE ASSETS. I HAVE GONE THROUGH THE FACTS OF THE CASE AND RIVAL SUBMIS SIONS AND HAS FOUND THAT THE DECISION IN THE CASE CITED SUPRA IS APPLIC ABLE TO THE ASSESSMENT AND THE SUBSIDY PRIOR TO THE DATE OF AMENDMENT TO S ECTION 43(1) BUT THE SUBSIDY HAS BEEN RECEIVED DURING THE YEAR. THE EXPLANATION 10 TO 43(1) IS DULY APPLICABLE. ALL THE ASSET HAVE BECOM E PART OF THE BLOCK OF ASSETS, THE ACTION OF THE A.O. IN REDUCING THE S UBSIDY FROM THE COST OF ASSETS IS HEREBY CONFIRMED. 5.1 THUS THE CIT(A) UPHELD THE FINDING OF THE A.O. ON THE ISSUE OF ALLOWABILITY OF DEPRECIATION AFTER REDUCING THE SUB SIDY RECEIVED BY THE ASSESSEE. 6. THE LEARNED D.R. CONTENDED THAT THE ISSUE RAISED IN GROUND NOS.1 & 2 IS COVERED BY THE DECISION OF THE JURISDICTIONAL HI GH COURT, IN THE CASE OF C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 01 (P&H). HE, FURTHER, CONTENDED THAT THERE IS NO EVIDENCE OF BUSINESS EXP EDIENCY AND NO BUSINESS TRANSACTIONS WERE INVOLVED IN RESPECT OF PARTIES, T O WHOM LOANS WERE GIVEN. THE LEARNED D.R. REFERRED TO PAGE 4 OF THE ASSESSME NT ORDER, WHEREBY CATEGORIES OF VARIOUS ADVANCES ARE MENTIONED.. 6.1 THE LEARNED A.R., ON THE OTHER HAND, CONTENDED THAT THE ADVANCES WERE MADE FOR THE PURCHASE OF LAND REQUIRED FOR BUS INESS TRANSACTION. HE REFERRED TO PAGES NOS.3, 27, 29 AND 31 OF THE PAPER BOOK. THE LEARNED A.R. 6 ALSO STRESSED THAT THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES(SUPRA) IS APPLICABLE ONLY IN CA SE WHERE ADVANCES GIVEN TO SISTER CONCERN AND NOT IN OTHER CASE 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, PERUSED THE RELEVANT RECORDS INCLUDING THE PAPER BOOK AND THE C ASE LAWS CITED BY THE PARTIES AND THE IMPUGNED ORDERS PASSED BY THE LOWER AUTHORITIES. IN OUR CONSIDERED OPINION, THE ISSUE IN HAND IS SQUARELY C OVERED, IN FAVOUR OF THE REVENUE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT, IN THE CASE C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 01 (P&H ), WHEREIN THE HONBLE HIGH COURT HAS HELD AS UNDER:- SECTION 36(1)(III) OF THE INCOME TAX ACT, 1961, PR OVIDES FOR DEDUCTIONS OF INTEREST ON LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION IN THE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSI NG OFFICER THAT WHATEVER LOANS WERE RAISED BY THE ASSESSEE WERE USE D FOR BUSINESS PURPOSES. IF IN THE PROCESS OF EXAMINATION OF GENU INENESS OF SUCH A DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE HAD ADVA NCED CERTAIN FUNDS TO SISTER CONCERNS OR ANY OTHER PERSON WITHOUT ANY INT EREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO DISCHARGE B EFORE THE ASSESSING OFFICER TO THE EFFECT THAT IN SPITE OF PE NDING TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE IS INCU RRING LIABILITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LO ANS TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOUT ANY INTEREST AND ACCORDINGLY THE ASSESSEE SHOULD BE ALLOWED DEDUCTION OF INTEREST BE ING PAID ON THE LOANS RAISED BY IT TO THAT EXTENT. THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A CO MMON KITTY. MONIES RECEIVED AS SHARE CAPITAL OR AS TERM LOAN OR AS WORKING CAPITAL LOAN OR AS SALE PROCEEDS DO NOT HAVE A DIFFERENT CO LOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS, HAVE THE COLOUR OF BU SINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. THE ONLY THING SU FFICIENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT TH E AMOUNT IS LENT TO A SISTER CONCERN WITHOUT CARRYING ANY INTEREST FOR NO N-BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE ASSESSEE HAD A SUR PLUS WHICH, ACCORDING TO IT, COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL 7 INSTITUTION, IT WOULD EITHER BE REQUIRED TO BE CIRC ULATED AND UTILIZED FOR THE PURPOSE OR BUSINESS OR TO BE INVESTED IN A MANN ER IN WHICH IT GENERATES INCOME AND NOT DIVERTED TOWARDS SISTER CO NCERNS FREE OF INTEREST. THIS WOULD RESULT IN NOT PRESENTING THE TRUE AND CORRECT PICTURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE C OST BEING INCURRED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. THERE SHOULD BE NEXUS BETWEEN THE USE OF BORROWED F UNDS FOR THE PURPOSE OF BUSINESS TO CLAIM DEDUCTION UNDER SECTIO N 36(1)(III) OF THE ACT. THAT BEING THE POSITION, THERE IS NO ESCAPE F ROM THE FINDING THAT INTEREST BEING PAID BY THE ASSESSEE TO THE EXTENT T HE AMOUNTS ARE DIVERTED TO SISTER CONCERNS ON INTEREST FREE BASIS ARE TO BE DISALLOWED. IF THE PLEA OF THE ASSESSEE IS ACCEPTED THAT THE IN TEREST FREE ADVANCES MADE TO THE SISTER CONCERNS FOR NON-BUSINE SS PURPOSES WERE OUT OF ITS OWN FUNDS IN THE FORM OF CAPITAL INTRODU CED IN BUSINESS, THAT AGAIN WILL SHOW A CAMOUFLAGE BY THE ASSESSEE AS AT THE TIME OF RAISING OF LOAN, THE ASSESSEE WOULD SHOW THE FIGURES OF CAP ITAL INTRODUCED BY IT AS A MARGIN FOR LOANS BEING RAISED AND AFTER TH E LOANS ARE RAISED, WHEN SUBSTANTIAL AMOUNTS ARE DIVERTED TO SISTER CON CERNS FOR NON- BUSINESS PURPOSES WITHOUT INTEREST, A PLEA WOULD BE RAISED THAT THE AMOUNT ADVANCED WAS OUT OF ITS CAPITAL, WHICH IN FA CT STOOD EXHAUSTED IN SETTING UP OF THE UNIT. SUCH A PLEA MAY BE ACC EPTABLE AT A STAGE WHEN NO LOANS HAVE BEEN RAISED BY THE ASSESSEE AT T HE TIME OF DISBURSEMENT OF FUNDS. THIS WOULD DEPEND ON THE FA CTS OF EACH CASE. THE VIEW THAT WHERE THE AMOUNT IS ADVANCED FROM A M IXED ACCOUNT OR SHARE CAPITAL OR SALE PROCEEDS OR PROFIT S, IT WOULD NOT BE DEEMED DIVERSION OF BORROWED CAPITAL OR THAT THE RE VENUE HAD NOT BEEN ABLE TO ESTABLISH NEXUS OF THE FUNDS ADVANCED TO THE SISTER CONCERNS WITH THE BORROWED FUNDS, IS NOT CORRECT. ONCE IT IS BORNE OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERT AIN FUNDS ON WHICH LIABILITY TO PAY TAX IS BEING INCURRED AND ON THE O THER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTH ERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURP OSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYI NG ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE AC T. 7.1 WE HAVE CAREFULLY PERUSED THE FINDINGS OF THE A .O. AND THE CIT(A), AS CONTAINED IN THEIR RESPECTIVE ORDERS. THE A.O. RES TRICTED THE DISALLOWANCE OF 8 INTEREST EXPENDITURE TO RS.20,18,639/- OUT OF TOTAL INTEREST EXPENDITURE INCURRED BY THE ASSESSEE AT RS.31,23,024/-. THE LE ARNED CIT(A) BY PLACING RELIANCE ON THE DECISION OF THE JURISDICTIONAL ITAT IN THE CASE OF GOPAL TIMBERS VS. ITO, 51 TTJ 393, GAVE FINDINGS THAT NO INTEREST IS DISALLOWABLE FROM THE ADVANCES GIVEN IN EARLIER YEARS. CONSEQUE NTLY, THE ADVANCES, COVERED BY THE DECISION OF THE JURISDICTIONAL TRIBU NAL (SUPRA), WERE ALLOWED BY THE CIT(A). THE ADDITION OF PROPORTIONATE INTERE ST ON ADVANCES GIVEN, WHERE LAND WAS NOT PURCHASED, WAS QUANTIFIED BY THE CIT(A) AT RS.9,83,548/- AND THE SAME WAS UPHELD. THEREFORE, T HE CIT(A), IN PRINCIPLE, HAS FOLLOWED THE DECISION OF JURISDICTIONAL HIGH CO URT. HAVING REGARD TO THE ABOVE FINDINGS GIVEN BY THE CIT(A), WE ARE OF THE O PINION THAT THE ISSUE, IN QUESTION, IS COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2 006) 286 ITR 01 (P&H) (SURPA) AND THE RELEVANT AND THE OPERATING PART OF THE DECISION HAS BEEN REPRODUCED ABOVE. 7.2 THE FINDINGS OF THE CIT(A), BASED UPON THE RATI O OF THE DECISION OF THE JURISDICTIONAL HIGH COURT (SUPRA) CANNOT BE ASSAILE D. IN VIEW OF THIS, THE FINDINGS OF THE CIT(A) ARE CONFIRMED. 8. C.O. NO.41(CHD)/2010 (ARISING OUT OF ITA NO.10 92(CHD)/2010):- GROUND NOS.1 AND 4 IN C.O. NO.41(CHD)/2010 ARE PUR ELY GENERAL IN NATURE AND HENCE REQUIRES NO ADJUDICATION. 9. GROUND NO.2 IN C.O. NO.41(CHD)/2010 RELATES TO T HE CONFIRMATION OF ADDITION OF RS.9,83,548/-, BY THE CIT(A). THIS GRO UND, IN C.O., IS INTER- CONNECTED WITH GROUND OF APPEAL NOS.1 AND 2 OF THE REVENUES APPEAL, ITA NO.1092(CHD)/2010. FOLLOWING OUR FINDINGS ON THE I SSUE GIVEN, IN THE 9 AFORESAID PARAS IN ITA NO.1092(CHD)/2010, WE DISM ISS GROUND NO.2, IN C.O. NO.41(CHD)/2010, FILED BY THE ASSESSEE. 10. AS REGARDS GROUND NO.3 IN C.O. NO.41(CHD)/2010, THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE HAS CREDITED AN AMOUNT OF RS. 27,89,600/-, ON ACCOUNT OF SUBSIDY TO THE RESERVES & SURPLUS, IN THE BALANCE SHEET IN THE PREVIOUS YEARS, IN QUESTION. ASSESSEE WAS ASKED BY THE A.O. TO GIVE DETAILS OF THE SUBSIDY AND TO STATE AS TO WHY THE SUBSIDY SHOULD N OT BE REDUCED FROM THE OPENING WRITTEN DOWN VALUE OF PLANT AND MACHINERY. IN RESPONSE, THE ASSESSEE STATED THAT THE SUBSIDY HAS BEEN RECEIVED FROM THE DIRECTOR OF INDUSTRIES, PUNJAB, DURING THE YEAR, THOUGH SANCTIO NED VIDE MEMO NO.INC 1/INVESTMENT INC./1992/1996, AS INVESTMENT INCENTIV E CLAIMS. HE, FURTHER, STATED THAT THE RECEIPT IS OF CAPITAL NATURE AND AS PER THE SCHEME OF THE GOVERNMENT TO PROMOTE THE INDUSTRY IN THE STATE. T HE ASSESSEE, FURTHER, REFERRED TO THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF CIT VS. P.J. CHEMICALS LTD., 210 ITR 830, IN SUPPORT OF HIS CLAIM. VIDE LETTER DATED 24-11-2009, THE ASSESSEE GAVE FURTHER REPLY ON THE ISSUE, WHICH IS REPRODUCED AS UNDER:- WE HAVE ALREADY EXPLAINED IN RESPECT OF SUBSIDY RE CEIVED. WE MAY FURTHER SUBMIT THAT THE SUBSIDY WAS SANCTIONED IN AUGUST, 1996 AND ONLY THE DISBURSEMENT WAS MADE DURING THE YEAR UNDE R CONSIDERATION. IN SUPPORT COPY OF SANCTION LETTER HAS ALREADY BEEN FILED. THE ASSESSEES CASE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF CIT VS. P.J. CHEMICALS LT D., 210 ITR 830. THE AMENDMENT MADE BY THE FINANCE ACT, 1998 BY INSE RTING EXPLANATION 10 TO 43(1) IS APPLICABLE FROM 1-4-1999 , WHEREAS IN OUR CASE THE SUBSIDY WAS SANCTIONED DURING 1996. T HIS WAS PERTAINING TO THE ASSETS ACQUIRED ON OR BEFORE 31-3 -1996. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HA S NOT RECEIVED ANY SUBSIDY WHICH WAS TO MEET THE COST OF ASSETS ACQUIRED DURING THE YEAR UNDER CONSIDERATION. THUS THE SUBSIDY 10 RECEIVED DURING THE YEAR IS NOT DEDUCTIBLE FROM THE COST/WDV OF THE ASSETS AS THE SUBSIDY IS BASED ON INVESTMENT IN FIXED ASSETS MADE BY THE ASSESSEE COMPANY DURING THE YEAR 1995-96 AND NOT EVEN A SINGLE ASSET PURCHASED DURING THE YE AR WAS SUBSIDIZED. 10.1 THE A.O. AFTER APPRECIATION OF THE SUBMISSION OF THE ASSESSEE, REJECTED ITS CONTENTION. IT WAS OBSERVED BY THE A.O. THAT T HE DECISION OF THE HONBLE SUPREME COURT REFERRED TO BY THE ASSESSEE IS DATED 14-9.1994. THE PROVISIONS OF INCOME TAX ACT, 1961, WHICH DEFINES C OST OF ASSETS TO THE ASSESSEE HAVE BEEN AMENDED BY INSERTING A NEW EXPLA NATION 10 TO SECTION 43(1) OF THE ACT. THE EXPLANATION IS REPRODUCED H EREUNDER:- WHERE A PORTION OF THE COST OF AN ASSET ACQUIRED B Y THE ASSESSEE HAS BEEN MET DIRECTLY OR INDIRECTLY BY THE CENTRAL GOVE RNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY ESTABLISHED UNDER ANY L AW 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 OF REIMB URSEMENT IS OF SUCH NATURE THAT IT CANNOT BE DIRECTLY RELATABLE TO THE ASSET ACQUIRED, SO MUCH OF THE AMOUNT WHICH BEARS TO THE TOTAL SUBS IDY OR REIMBURSEMENT OR GRANT THE SAME PROPOSITION AS SUCH ASSET BEARS TO ALL THE ASSETS IN RESPECT OF OR WITH REFERENCE TO WHICH THE SUBSIDY OR GRANT OR REIMBURSEMENT IS TO RECEIVED, SHALL NOT BE INCLU DED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. THE A.O. AT PAGE 12 OF THE SAID ASSESSMENT ORDER OB SERVED AS UNDER:- THE ABOVE REPRODUCED AMENDMENT HAS BEEN MADE W.E.F . 1-4-1999 AND JUDGMENT OF THE HONBLE SUPREME COURT HAS BEEN DELIVERED PRIOR TO THE AMENDMENT AND IS THUS NOT RELEVANT FOR THE I SSUE IN THIS ASSESSMENT YEAR. AS REGARDS STATEMENT THAT SUBSIDY WAS SANCTIONED DURING 1996, ASSESSEE IMPLIES HERE THAT THE SUBSIDY WAS SANCTIONED PRIOR TO THE ABOVE REFERRED AMENDMENT DATED 1-4-199 9 AND SO THE HONBLE SUPREME COURTS JUDGMENT IN P.J. CHEMICALS LTD. SHOULD BE 11 TREATED AS GOOD LAW FOR THE ISSUE IN HAND. THIS ST ATEMENT OF THE ASSESSEE IS NOT ACCEPTED AS MATERIAL BECAUSE PRIOR TO THIS YEAR I.E. F.YR. 2006-07 ASSESSEE HAD NOT SHOWN ANY ENTRY IN ITS ACC OUNTS ABOUT SUBSIDY RECEIVABLE. IN THE ABSENCE OF THE SAME, IT CANNOT BE STATED THAT THE ASSESSEES CASE IS COVERED UNDER ABOVE MENTIONE D JUDGMENT AND HENCE THE ABOVE AMENDMENT IN I.T. ACT IS NOT ATTRAC TED. AS PER THE AMENDED PROVISIONS, AMOUNT OF SUBSIDY IS TO BE REDU CED FROM ACTUAL COST OF PLANT AND MACHINERY. TOTAL WDV OF PLANT & MACHINERY 39,96,586/- (ASSETS OTHER THAN LAND & COMPUTER) WDV OF BUILDING (DEP.@ 10%) 14,53,003/- WDV OTHER ASSETS (DEP. @ 15%) 25,43,583/- RATIO 36.64 SUBSIDY ATTRIBUTED TO ASSETS @ 36% 10,04,256/- WITH DEPRECIATION @ 10% SUBSIDY ATTRIBUTED TO ASSETS @ 64% WITH DEPRECIATION @ 15% 17,85,344/- TOTAL SUBSIDY 27,89,600/- DEPRECIATION DISALLOWABLE 10% OF RS.10,04,256/- & 15% OF RS.17,85,344/- (10,04,256 + 2,67,801) 3,68,226/- THUS, THE A.O. MADE THE ADDITION OF RS.3,68,226/-, TO THE ASSESSEES INCOME BEING DEPRECIATION ALLOWANCE DISALLOWED BY REDUCING SUBSIDY RECEIVED FROM THE COST OF ASSETS. 10.2 ON APPEAL, THE LEARNED CIT(A), UPHELD THE ACTI ON OF THE A.O., IN REDUCING THE SUBSIDY FROM THE COST OF ASSETS AND SU BSEQUENTLY DETERMINED THE ADMISSIBLE DEPRECIATION. THE CIT(A), IN PARA 4.2, AT PAGE 3, HELD AS UNDER:- 4.2 THE A.O. REJECTED THE CONTENTION OF THE ASSESS EE AND HELD THAT EXPLANATION 10 TO SECTION 43(1) IS APPLICABLE AND T HE AMOUNT OF SUBSIDY RECEIVED HAS TO BE REDUCED FROM THE COST OF THE ASSETS. I HAVE GONE THROUGH THE FACTS OF THE CASE AND RIVAL SUBMIS SIONS AND HAS FOUND THAT THE DECISION IN THE CASE CITED SUPRA IS APPLIC ABLE TO THE ASSESSMENT AND THE SUBSIDY PRIOR TO THE DATE OF AMENDMENT TO S ECTION 43(1) BUT THE SUBSIDY HAS BEEN RECEIVED DURING THE YEAR. THE EXPLANATION 10 TO 12 43(1) IS DULY APPLICABLE. ALL THE ASSET HAVE BECOM E PART OF THE BLOCK OF ASSETS, THE ACTION OF THE A.O. IN REDUCING THE S UBSIDY FROM THE COST OF ASSETS IS HEREBY CONFIRMED. 10.3 IN SUPPORT OF HIS CLAIM, THE LEARNED A.R. PLA CED RELIANCE ON THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. SIYA RAM GARG(HUF), REPORTED IN (2011) 237 CTR (P&H ) 321. THE LEARNED D.R. SUBMITTED THAT THE QUANTUM OF SUBSIDY IS TO BE REDUCED FROM THE COST OF ASSETS AS THE AMOUNT OF SUBSIDY, IN VIEW OF THE FINDINGS OF THE A.O. AND THE CIT(A). 10.4 WE HAVE CAREFULLY PERUSED AND CONSIDERED THE RIVAL SUBMISSIONS, THE RELEVANT RECORDS AND THE ORDERS OF THE LOWER AUTHOR ITIES INCLUDING THE CASE LAWS CITED BY THE CONTENDING PARTIES. 10.5 IT IS UNDISPUTED FACT THAT THE ASSESSEE DID NO T BRING THE FACTUM OF SANCTION OF THE IMPUGNED SUBSIDY, IN AUGUST, 1996, BY WAY OF RECORDING THE SAME IN HIS REGULAR BOOKS OF ACCOUNTS. THE ASSESSE E PASSED THE ENTRY OF SUCH SUBSIDY, IN THE PREVIOUS YEAR, UNDER REFERENCE . HENCE, THE RECORDING OF SUCH FACTUM OF SUBSIDY BY THE ASSESSEE, IN THE REGU LAR BOOKS OF ACCOUNTS, IN THE ASSESSMENT YEAR IN QUESTION, IS NOT IN DISPUTE. IN VIEW OF THIS, THE FINDINGS OF THE A.O. AND THE CIT(A), DO NOT SUFFER FROM ANY INFIRMITY. HOWEVER, THE ASSESSEE PLACED RELIANCE ON THE DECISI ON OF THE JURISDICTIONAL HIGH COURT, IN THE CASE OF CIT VS. SIYA RAM GARG(H UF), REPORTED IN (2011) 237 CTR (P&H) 321(SUPRA). A BARE PERUSAL OF THE DECISION OF THE HONBLE HIGH COURT REVEALS THAT THE SAME HAS BEEN DELIVERED, IN THE CONTEXT OF DETERMINATION OF NATURE OF SUBSIDY, WHETHER CAPI TAL OR REVENUE NATURE. IT HAS BEEN HELD THEREIN BY THE HONBLE HIGH COURT THA T IF SUBSIDY IS RECEIVED FOR SETTING UP INDUSTRY, IT IS A CAPITAL RECEIPT. SUCH FINDING OF THE HONBLE COURT DID NOT CONSIDER AND ADJUDICATE THE ISSUE OF REDUCTION OF SUBSIDY FOR 13 THE PURPOSE OF QUANTIFICATION OF ELIGIBLE DEPRECIAT ION. HENCE, THIS DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. T HE AMENDED PROVISION OF SECTION 43(1) IN THE FORM OF INSERTION OF EXPLANATI ON 10 THERETO W.E.F. 1-4-1999, SUPPORTS THE FINDINGS OF THE CIT(A). THE FACTUM OF RECORDING APPEARANCE OF THIS SUBSIDY IN QUESTION, FOR THE FIR ST TIME, IN THE RELEVANT ASSESSMENT YEAR, SUPPORTS THE FINDINGS OF THE LOWER AUTHORITIES. IN VIEW OF THIS, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF P.J. CHEMICALS LTD.(SUPRA) IS NOT APPLICABLE TO THE PRES ENT CASE. HAVING REGARD TO THE ABOVE DISCUSSION, THE FINDINGS OF THE CIT(A) ARE UPHELD. 11. IN VIEW OF THE ABOVE DISCUSSION, THE C.O. FILED BY THE ASSESSEE IS DISMISSED. 12. IN THE RESULT, BOTH THE APPEAL FILED BY THE DEP ARTMENT AND C.O. FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 A UGUST, 2011. SD/- SD/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER. ACCOUNTANT MEMBER. DATED: 24 AUGUST, 2011. KC/- COPY OF THE ORDER FORWARDED TO:- (1) THE ASSESSEE: M/S.SMT MACHINE (INDIA) LTD., MANDI G OBINDGARH. (2) THE DY. CIT, CIRCLE, MANDI GOBINDGARH. (3) THE CIT, (4) THE CIT(A), PATIALA. (5) THE SR. DR, ITAT, CHANDIGARH. TRUE COPY BY ORDER ASSTT. REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH.