Munjal Auto Industries Ltd. vs Deputy Commissioner of Income Tax

Akil Abdul Hamid Kureshi, J.—These Tax Appeals have been filed by the assessee challenging the common order of the Income Tax

Appellate Tribunal (for short ""ITAT""). We may notice the facts narrated in Tax Appeal No. 342 of 2012. In such Appeal, the assessee has

presented following substantial questions of law for our consideration:

(i) Whether on the facts and in the circumstances of the case, the Tribunal was within its rights in giving a direction to the Assessing Officer that he

must allow the depreciation on the actual cost reduced by the amount of such subsidy under sec. 43(1) of the Income Tax Act, 1961?

(ii) Even if the reply to the above question is in the affirmative, whether the Tribunal was right in law in holding that the portion of the actual cost is

met directly or indirectly by the above subsidy as required by section 43(1), and therefore, the Assessing Officer must allow depreciation on such

reduced cost (actual cost less subsidy)?

The assessee is a company engaged in the business of manufacture having its units at GIDC Estate, Waghodia, Baroda and outside of Gujarat also.

In the Assessment Year 2003-2004, the assessee had received incentive in the form of sales tax deferment from the Government of Haryana under

the scheme so formulated by the State Government. It gave boost to the investment in the industrial sector.

Between the revenue and the assessee, the dispute arose whether such receipt should be treated in the nature of capital as contended by the

assessee or revenue receipt as contended by the revenue. The Assessing Officer held that subsidy was in the nature of revenue receipt. The

assessee carried the matter before the Deputy Commissioner who reversed the order of the Assessing Officer. Revenue thereafter approached the

Tribunal and the Tribunal though substantially upheld the view of the Commissioner, in the last paragraph of the judgment, made certain

observation against the assessee which is the subject-matter of these appeals. Such observation is reproduced as under:

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. The Ground No. 2 is partly allowed as indicated above.

On 08.01.2013, after hearing learned counsel Mr. J.P. Shah, we have issued notice for final disposal, making following observations:

Question No. 1 reproduced above pertains to assessee''s contention that the Tribunal had no power to give any such consequential directions,

having once held that the Commissioner (Appeals) was correct in treating the receipt as capital in nature. Question No. 2 pertains to the assessee''s

contention that it is not in every case that the moment a receipt is treated as capital in nature, it must go on to reduce the cost of acquisition of the

depreciable assets and that therefore for the purpose of depreciation, the value of the capital investment should be correspondingly reduced.

Insofar as question No. 1 is concerned, despite strong representation made by Shri J.P. Shah for the appellant, we are unable to see any illegality

committed by the Tribunal. The Tribunal u/s 254(1) of the income tax Act, 1961, has power to pass such order in an appeal as it thinks fit after

giving both the parties to the appeal an opportunity of being heard. It is not the case of the appellant that no opportunity of being heard was

granted. It is, in fact, the case of the appellant that such contention was not raised by the counsel for the Department in appeal before the Tribunal.

No such ground having been taken in appeal, the same could not have been entertained by the Tribunal. In fact, counsel vehemently contended that

the appeal of the Revenue before the Tribunal was whether the Commissioner (Appeals) was justified in treating the receipt as capital in nature.

The Tribunal having confirmed such a view of the CIT (Appeals), thereafter, had no jurisdiction to pass any further order.

To our mind, such contention cannot be accepted. Firstly, as already noted, under sub-section (1) of section 254 of the income tax Act, the

Tribunal enjoys considerable power of discretionary character of passing such order as it thinks fit on an appeal presented before it either by the

assessee or by the Revenue. The only requirement is that both parties to the appeal should be given a hearing. Secondly, in essence, what the

Tribunal did by passing the earlier noted consequential direction was to allow the Revenue''s appeal partially. Insofar as the Revenue''s stand that

the receipt was revenue in nature was not accepted. However, insofar as the consequential relief prayed for by the Revenue, albeit, through an oral

contention, that in case the Tribunal holds that the receipt was capital in nature the same should go to reduce the cost of acquisition was accepted.

In fact, the Tribunal did so specify in the order itself by recording that ground No. 2 is partially allowed.

The sum total of the above discussion is that in essence, what the Tribunal did was to allow the Revenue''s appeal in part. Insofar as the substantive

challenge to the CIT (Appeals) view that the receipt was capital in nature was rejected, however, the consequential fallout of such a view, namely,

that the capital receipt should reduce the cost of acquisition was accepted by the Tribunal. We do not think that the Tribunal had power either only

to accept the view of the Commissioner (Appeals) in toto or to reject the same in its entirety.

Insofar as the technical contention of the assessee that the Tribunal could not have entertained such a contention and given consequential direction

is concerned, we do not see any reason to interfere. We may reiterate that it is not even the case of the assessee that he was taken by surprise and

that the Tribunal did not permit reasonable opportunity of meeting with such a ground.

Insofar as the second question is concerned, we are, prima facie, of the opinion that the Tribunal proceeded on the basis that the moment there is a

receipt of capital in nature by way of subsidy or incentive, the same should go to reduce the cost of acquisition as a necessary corollary. It appears

that the Tribunal did not examine the nature of the scheme and the purpose for which the subsidy was being made available and such other relevant

factors while deciding such an issue. In this respect, following three decisions cited by Shri J.P. Shah would be relevant.

(i) Commissioner of Income Tax Vs. Grace Paper Industries Pvt. Ltd., Whitco Ltd., Amit Stampings and Narendra M. Lakhadia,

(ii) Mahesana District Co-operative Milk Producers Union Ltd. Vs. Commissioner of Income Tax,

(iii) Commissioner of Income Tax Vs. Swastik Sanitary Works Ltd.

Issue notice for final disposal for consideration of question No. 2 only, returnable on 12th February, 2013.

We may record that against the very same judgment of the Tribunal insofar as it held that the sales tax benefits received by the assessee were in

the nature of capital receipt, the revenue had approached this Court by filing Tax Appeal No. 450/2012 and connected appeals. Such appeals

came to be dismissed by judgment dated 28.01.2013. In the upheld view of the Tribunal, whether receipts are capital in nature. Insofar as the

number of controversies between the parties is concerned, the same stands concluded at our level by virtue of the said judgment.

Short question arises that where the Tribunal while held the receipts are capital in nature, it could also have given further direction. In that case,

the same should go on to reduce the cost of acquisition.

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.

Though applicability of the proposition canvassed 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 observation of the Tribunal is only discussed to throw light on this aspect of the matter.

Under the circumstances, we request the Tribunal to consider the issue afresh bearing in mind the nature of subsidy, purpose for which the same

was made available and all other relevant factors bearing in mind the case laws cited before us and which may further be argued before the

Tribunal by both the sides. For this limiter purpose, the question is placed before the Tribunal for afresh consideration and disposal in accordance

with law. We clarify that we express no opinion on merit or demerit of rival contentions raised before the Tribunal.

Tax Appeals disposed of, accordingly.