Gujarat State Electricity Corp. Ltd., Baroda V. The Deputy Commissioner of Income Tax, Circle-1(1)(1), Vadodara

ITA 2991/AHD/2016

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4609 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 15-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAI PRATAP SINGH
• Keywords: Capital asset; Depreciation; Set aside
• Section: 10; 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH (Conducted Through Virtual Court) Before: Ms. Annapurna Gupta, Accountant Member And Ms. Madhumita Roy, Judicial Member Gujarat State Electricity Corporation Ltd., Sardar Patel Vidyut Bhavan, Race Course Road, Baroda PAN No: AAACG6864F (Appellant) Vs The DCIT, Circle-1(1)(1), Vadodara (Respondent) Appellant by : Shri M.J. Shah, A.R. Respondent by : Shri Ajai Pratap Singh, CIT/DR Date of hearing : 04-04-2022 Date of pronouncement : 13-04-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:- The present appeal has been filed by the Assessee against the order passed by the Commissioner of Income Tax (Appeals)-1, Vadodara, (in short referred to as CIT(A)), dated 30-08-2016, u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2007-08. 2. At the outset itself, it was pointed out that the solitary issue involved in the present appeal related to disallowance of excess depreciation claimed by the assesse on account of capital grants received by it not adjusted against the cost ITA No. 2991/Ahd/2016 Assessment Year 2007-08 I.T.A No. 2991/Ahd/2016 A.Y. 2007-08 Page No Gujarat State Electricity Corporation Ltd. vs. DCIT 2 of the assets ,as required by the provisions of section 43(1) Explanation 10. The ground raised in this regard are as under: 1.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of the Assessing Officer in disallowing the excess depreciation by invoking Explanation 10 to Section 43(1) of the I T Act. The learned Commissioner (Appeals) erred in law and on facts has followed the decision of the subsequent year in the appellant's case in disallowing the alleged excess depreciation. 2. Ld. Counsel for the assesse pointed out that the disallowance of depreciation related to capital grants received by the assesse which had been directly taken to the Reserve and Surplus account of the assesse while the A.O. held that the same ought to have gone to reduce the cost of the asset acquired by the assesse and hence resulted in reduced depreciation. That accordingly the AO. worked out the excess depreciation claimed by the assesse amounting to Rs. 4,50,68,000/- and disallowed the same. The ld. CIT(A) noted that identical issue had arisen in the case of the assesse for Assessment Year 2008-09 wherein 15% as of the year end balance of capital grant was disallowed as excess depreciation and noting that the said order was upheld in appeal, he dismissed this ground raised by the assesse before him in the impugned year. 3. Before us, ld. Counsel for the assesse pointed out that identical issue has been adjudicated by the ITAT in the case of Gujarat Energy Transmission Corporation Ltd. In ITA No. 761/Ahd/2012 for A.Y. 2008-09 vide order dated 12.06.2015 wherein the issue has been restored back to the A.O. for verifying the proportionate amount of grant relating to different assets and thereafter I.T.A No. 2991/Ahd/2016 A.Y. 2007-08 Page No Gujarat State Electricity Corporation Ltd. vs. DCIT 3 applying the rate of depreciation relating to these assets. Our attention was drawn to Para 15 to 20 of the order as under: 15. The ground no.3 of the appeal of the assessee is directed against the order of the CIT(A) in confirming the action of the AO in transferring 15% of the capital grants as income although the disallowance made under this head has been restricted to Rs.18,93,11,850/- as against the disallowance of Rs.30,97,61,800/- made by the AO. 16. The brief facts of the case are that on verification of subsidies and grants, the AO observed that the assessee has shown deferred government grants, subsidies, contribution at Rs.7305.70 lakhs as on ITA No.704 and 761/Ahd/2012 1.4.2007 and the assessee had shown Rs.15941.67 lakhs at the end of the year i.e. as on 31.3.2008. On show cause by the AO to explain the treatment in accounts of the subsidy, grants the assessee stated that during the year capital grant received from Government of Gujarat and other. The assessee submitted that in order to improve various functions associated with the generation, transmission and distribution of electricity, and also because the PSUs connected with power section were making consistent losses, the Government decided to introduce reforms in the direction of State PSUs. Accordingly, under the provision of Gujarat Electricity Industrial (Reorgnisation & Regulation) Act, 2000, the erstwhile GEB was split into seven companies, for the purpose of financial restructuring plan, and the approval was accorded to provide some financial/capital support to GUVNL. The grant was given in terms of the power reforms for the overall development of the power sector. Such grant was not granted to actually meet the cost of assets. Further, the grant was given to the holding company, GUVNL and then it was allocated to the assessee company, one of the subsidiary companies. The assessee was not entitled to an amount beyond a certain limit, even if it is spent large amount on purchase of fixed assets. Further, the grant was not with reference to any particular fixed assets. It was further submitted that the resolution sanctioning the grant no where indicated that the grant was meant to offset the cost of the capital assets purchased by the company. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT Vs. P.J. Chemicals Ltd., 121 CTR 201, wherein the decision of the Gujarat High Court in the case of CIT Grace Paper Industries P. Ltd., 83 CTR 1, which was affirmed by the Hon'ble I.T.A No. 2991/Ahd/2016 A.Y. 2007-08 Page No Gujarat State Electricity Corporation Ltd. vs. DCIT 4 Supreme Court by observing that the amount of subsidies and grants received by the assessee cannot be reduced from the cost of assets. It was further submitted that the subsidy received under scheme cannot be reduced from the actual cost of the assets by applying the provisions of section 43(1) of the Income Tax Act. The AO did not accept the submission of the assessee and held that the submission of the assessee that the grant was not capital in nature, is factually incorrect, and from the resolution, it was clear that the grant received from the State Government was in the nature of capital grant and it should have been reduced from the capital assets. The decisions quoted by the assessee are not applicable after insertion of Explanation 10 of section 43(1) of the Act, as they pertained to earlier years prior to insertion of Explanation 10 of section 43(1) of the Act. After insertion of Explanation 10 of section 43(1) of the Act, the position of law was very clear. Since the assessee failed to reduce the capital grant against the cost of capital assets, and claimed excess depreciation, which was disallowed and worked out at 15% of the capital assets. 17. On appeal, the CIT(A) held that in assessee's case, 10% of grant under three heads namely "Subsidy towards cost of capital assets", "Grants towards cost of capital assets" and "Consumer contribution for capital assets" i.e. the grants appearing in Schedule -3 of the balance sheet as on 31.3.2008 were offered for tax. The amount of grant on which 10% was calculated was on the opening balance of grants of Rs.73,05,70,492/-, and the grants received during the year was Rs.103,56,34,226/-, aggregating to Rs.176,62,04,718/-. As these grants were towards cost of capital assets, 15% of the same should have been reduced from the depreciation claimed on account of making adjustment in the 'actual cost' of assets as per Explanation 10 below section 43(1). Since the assessee has already offered for tax, 10% of the opening balance of grants plus grants received during the year under these three heads of Schedule-3 grants, such amount offered for tax was to be reduced from the excess depreciation to be disallowed at the rate of 15% of Rs.176,62,04,718/- i.e. Rs.26,49,30,708/-. The net disallowance on this count worked out Rs.26,49,30,708/- minus Rs.17,20,37,655/-, the amount already offered for taxation i.e. Rs.9,28,93,053/-. Since no portion of grant of Rs.6427.94 lakhs being capital grant for capital support appearing in Schedule-2 of the balance sheet as on 31.3.2008 was offered as income nor it was reduced from the cost of assets, 15% of I.T.A No. 2991/Ahd/2016 A.Y. 2007-08 Page No Gujarat State Electricity Corporation Ltd. vs. DCIT 5 the same i.e. Rs.964.191 lakh needed to be disallowed as excess depreciation claimed in respect of the same. The total disallowance towards excess depreciation, therefore, worked out to Rs.9.289 crores plus Rs.9.641 crores i.e. Rs.18.93 crores. Thus, instead of net addition of Rs.30,97,61,800/- made by the AO, addition of Rs.18.93 crore was directed to be made on this count. 18. Before us, the AR of the assessee argued that uniform rate of 15% cannot be applied for making disallowance. He submitted that the grant should be apportioned according to the value of the asset given in the balance sheet. He argued that the rate of depreciation on land was zero percent, building was 5% and the plant & machinery was 15%, and hence, the disallowance at the uniform rate at 15% is not justified. 19. On the other hand, the DR argued and submitted that the order of the CIT(A) was correct, and he after appreciating the entire facts had reduced the disallowance from Rs.30.97 crores to Rs.18.93 crores. 20. We find that in the instant case, the CIT(A) held that excess depreciation claimed on account of capital grant comes to Rs.18.93 crores being 15% of Rs.176,62,04,718/-, i.e. Rs.26,49,30,708/- minus Rs.17,20,37,655/-, which amounts to Rs.9,28,93,053/-, and 15% of Rs.6427.94 lakhs amounting to Rs.964.191 lakh. The submissions of the assessee before us is that the uniform rate of 15% adopted by the CIT(A) is not justified. As per provisions of section 43(1) of the Act, the capital grant should be reduced from the cost/WDV of the relevant asset, and thereafter the depreciation is to be calculated. Thus, the capital grant receipt in respect of asset, on which depreciation is allowable at the rate different from 15% should be worked out as per the applicable rate. The DR could not point out any mistake in the above submission of the assessee, which we find is in accordance with law. We, therefore, set aside the orders of the lower authorities on this issue, and restore the matter back to the file of the AO for adjudication afresh after verifying the proportionate amount of grant relating to different asset, and applying the actual rate of depreciation which relate to these assets. Thus, this ground of appeal of the assessee is allowed for statistical purpose. I.T.A No. 2991/Ahd/2016 A.Y. 2007-08 Page No Gujarat State Electricity Corporation Ltd. vs. DCIT 6 4. He therefore stated that the issue in the present case being identical, it is covered by the order of the ITAT in the case of Gujarat Energy Transmission Corporation Ltd.. 5. Ld. D.R. was unable to point out any distinguishing fact. 6. We have gone through the facts of the present case and also the decision of the ITAT in the case of Gujarat Energy Transmission Corporation Ltd. (supra) and we have noted that in both the cases, the issue was identical relating to disallowance of depreciation on account of capital grant received by the assesse not adjusted against the cost of asset as per the provisions of Explanation 10 to Section 43 of the Act. In the case of Gujarat Energy Transmission Corporation Ltd.(supra).we have noted that the ITAT held that capital grants needed to be adjusted against the cost of the assets and excess depreciation needed to be disallowed and therefore restored the matter to the A.O. with the direction to allocate the capital grant on the basis of value of assets and after applying the rate of depreciation applicable to each asset as per the Income Tax Act to work out the excess depreciation claimed. Since the fact in the present case admittedly are identical the decision in the case of Gujarat Energy Transmission Corporation Ltd. (supra) will apply to the present case also following which we hold that the capital grants received by the assesse is to be adjusted against the cost of asset and reduced depreciation as a consequence be allowed. The matter is therefore restored back to the A.O. to be adjudicated in accordance with the direction of the ITAT in the case of Gujarat Energy Transmission Corporation Ltd. (supra). I.T.A No. 2991/Ahd/2016 A.Y. 2007-08 Page No Gujarat State Electricity Corporation Ltd. vs. DCIT 7 7. In effect appeal of the Assesse is allowed for statistical purposes. Order pronounced in the open court on 13-04-2022 Sd/- Sd/- (MADHUMITA ROY) (ANNAPURNA GUPTA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad : Dated 13/04/2022 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद