By TIOL News Service

KOLKATA, AUG 01, 2016: THE ISSUE IS - Whether incentive in the form of a subsidy granted under a State Government's Scheme intended to accelerate industrial development of such State, can be treated as revenue receipt and therefore reduced from the cost of capital asset for purpose of computing depreciation. NO IS THE ANSWER.

Facts of the case:

The assessee is engaged in the business of providing consultancy services in the specialized field of management, finance and tax. During the subject year, the assessee was in receipt of interest subsidy from West Bengal Industrial Development Corporation (WBIDC) under the West Bengal Incentive Scheme, 2000 for new investment in Salt Lake, Kolkata. As per the Scheme, an eligible industrial unit for its approved project would be entitled to Interest Subsidy to the extent of 50% of the annual interest liability on the loan borrowed from a commercial bank/financial institution/NBFC approved by the RBI for implementation of the approved project, subject to a limit of Rs 100 lakhs per year depending on the location of the unit. The assessee treated the interest subsidy as a capital receipt by directly crediting it to reserves and surplus in the original return of income. Later on, based on the assessment order framed u/s 143(3) for the A.Y 2002-03, the assessee made a revised claim before the AO by crediting the interest subsidy to the cost of asset and claimed reduced depreciation accordingly. The AO observed that the interest subsidy was clearly given on the annual interest liability year to year on the loan borrowed by the assessee. He held that any interest payment on loan taken for business purpose was always revenue expenditure. Therefore, he held that the interest subsidy received by the assessee should also be treated as revenue receipt. On appeal, the CIT(A) held that the interest subsidy should not be taxed as revenue receipt but the same needs to be reduced from the cost of the asset and assessee was entitled to claim reduced depreciation accordingly.

After hearing the parties, the Tribunal held that,

++ it is not in dispute that the West Bengal Industrial Development Corporation Ltd (WBIDCL) had acknowledged the fact of assessee setting up a new unit for the software development at Salt Lake, Kolkata. The Eligibility Certificate for Incentives under W.B Incentive Scheme was issued by the WBIDCL confirming the setting up of the unit by assessee and its eligibility to receive incentives under the WB Incentive Scheme and accordingly had sanctioned the State Capital Investment Subsidy under Scheme 2000. Similarly Interest Subsidy was granted. This Tribunal holds that where subsidy was given to offset the cost of an asset, such payment would fall within the expression ‘met’, whereas the subsidy received merely to accelerate the industrial development of the state cannot be considered as payments made specifically to meet a portion of the cost of the asset. A careful perusal of the West Bengal Incentive Scheme 2000 shows that the scheme was intended to accelerate industrial development of the state and the incentive was given for setting up of industries in West Bengal and for the purpose of determining the amount of subsidy to be given, cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital.

++ under these circumstances, this Tribunal is of the view that incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it falls outside the ken of Explanation 10 to Section 43(1) of the Act. In the light of the above discussion, this Tribunal is of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the cost of the capital asset. In view of the facts and circumstances of the case, keeping in view the objects of the West Bengal Incentive Scheme 2000, we hold that the interest subsidy of Rs. 86,90,000/- is to be treated as capital receipt. Consequentially the assessee need not reduce the same from the cost of the asset for the purpose of claiming depreciation.

(See 2016-TIOL-1344-ITAT-KOL)