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Tax Publishers ACIT v. Inox Air Products (P) Ltd. [ITA No. 1117/PUN/2017, dt. 10-11-2020] : 2020 TaxPub(DT) 4685 (Pune-Trib) Capital subsidy credited to Capital reserve instead of adjusting against fixed assets as per Explanation 10 to section 43(1) *Facts:* Assessee was in receipt of a capital subsidy which was not for any fixed assets but was for setting up new industrial undertaking. This was credited to capital reserve. It was the revenue's plea that these be adjusted to the cost of fixed assets as per section 43(1) Explanation 10. The Commissioner (Appeals) concurred with the view of the assessee. On cross appeal first by the revenue and then countered by the assessee. Held in favour of the assessee that the capital subsidy received be taken to capital reserve and cannot be adjusted against the cost of fixed assets. *Editorial Note:* The decision of CIT v. PJ Chemicals (1994) 210 ITR 830 (SC) : 1994 TaxPub(DT) 1271 (SC) confirms the standpoint of the assessee. What is interesting to note is the further points of the ITAT discussed in this verdict especially in the realm of section 2(24)(xviii) post which subsidy of any form will become taxable except those covered under Explanation 10 to section 43(1). 7. At this juncture, it is pertinent to note that the Finance Act, 2015, with effect from 1-4-2016 inserted clause (xviii) to sub-section (24) to section 2 defining the term 'income' and thereafter the Finance Act, 2016 with effect from 1-4-2017 carried out an amendment to clause (xviii). The effect of these amendments is that the newly inserted clause (xviii) now reads as under :-- '(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, -- (a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or (b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;' 8. The Finance Act, 2018 w.r.e.f. 1-4-2017 substituted sections 145A and 145B for section 145A. Relevant part of the newly inserted section 145B reads as under :-- '145B. (1) ..................................... (2) ..................................... (3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.' 9. Now with the above amendments, subsidy falls within the definition of 'income' under section 2(24) and resultantly chargeable to tax in the year of receipt as per section 145B(3) in all cases except where Explanation 10 to section 43(1) gets magnetized, in which eventuality, it will go to reduce the cost of assets.

Tax Publishers

ACIT v. Inox Air Products (P) Ltd. [ITA No. 1117/PUN/2017, dt. 10-11-2020] : 2020 TaxPub(DT) 4685 (Pune-Trib)

Capital subsidy credited to Capital reserve instead of adjusting against fixed assets as per Explanation 10 to section 43(1)

Facts:

Assessee was in receipt of a capital subsidy which was not for any fixed assets but was for setting up new industrial undertaking. This was credited to capital reserve. It was the revenue's plea that these be adjusted to the cost of fixed assets as per section 43(1) Explanation 10. The Commissioner (Appeals) concurred with the view of the assessee. On cross appeal first by the revenue and then countered by the assessee.

Held in favour of the assessee that the capital subsidy received be taken to capital reserve and cannot be adjusted against the cost of fixed assets.

Editorial Note: The decision of CIT v. PJ Chemicals (1994) 210 ITR 830 (SC) : 1994 TaxPub(DT) 1271 (SC) confirms the standpoint of the assessee. What is interesting to note is the further points of the ITAT discussed in this verdict especially in the realm of section 2(24)(xviii) post which subsidy of any form will become taxable except those covered under Explanation 10 to section 43(1).

7. At this juncture, it is pertinent to note that the Finance Act, 2015, with effect from 1-4-2016 inserted clause (xviii) to sub-section (24) to section 2 defining the term 'income' and thereafter the Finance Act, 2016 with effect from 1-4-2017 carried out an amendment to clause (xviii). The effect of these amendments is that the newly inserted clause (xviii) now reads as under :--

'(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, --

(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or

(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;'

8. The Finance Act, 2018 w.r.e.f. 1-4-2017 substituted sections 145A and 145B for section 145A. Relevant part of the newly inserted section 145B reads as under :--

'145B. (1) .....................................

(2) .....................................

(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.'

9. Now with the above amendments, subsidy falls within the definition of 'income' under section 2(24) and resultantly chargeable to tax in the year of receipt as per section 145B(3) in all cases except where Explanation 10 to section 43(1) gets magnetized, in which eventuality, it will go to reduce the cost of assets.